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
Directors' Duties and Corporate
Contact Officer and Copyright Details
Corporate Law Economic Reform Program Bill
Date Introduced: 3 December 1998
House: House of Representatives
Commencement: Subject to a couple of minor
exceptions, the amendments commence on a day fixed by proclamation
which must be no later than six months from the date of
commencement of the Act.
In October 1993, the Commonwealth
Attorney-General established a Corporations Law
Simplification Program, the aim of which was to rewrite the
Corporations Law to make it easier to understand, and to
remove unnecessary business regulation. The first stage of the
program was completed in December 1995 with the commencement of the
First Corporate Law Simplification Act 1995.
An exposure draft of the Second Corporate Law
Simplification Bill was released for public comment by the Labor
government in June 1995. In response to comments and submissions
received in respect of that exposure draft, a second exposure draft
was released by the Corporations Law Simplification Task Force
(Simplification Task Force) in July 1996.
That second exposure draft (draft Bill) was
referred to the Parliamentary Joint Committee on Corporations and
Securities (PJC) by the then Parliamentary Secretary to the
Treasurer, Senator the Hon Brian Gibson AM, on 26 June 1996.
That Committee tabled its report in the Senate
on 18 November 1996 and made 11 specific recommendations. The
government responded to that report in November 1997.
The Second Corporate Law Simplification Bill was
amended slightly and reintroduced into the previous Parliament on 3
December 1997 and was renamed the Company Law Review Bill 1997. The
Company Law Review Bill 1997 was passed on 29 June 1998 and
commenced operation on 1 July 1998.
These changes also provided for an extensive
re-numbering of the provisions of the legislation.
In the meantime, in March 1997, the Coalition
government instituted the Corporate Law Economic Reform Program
(CLERP) to, in effect, continue the work of the Simplification Task
Force and, according to the government, to comprehensively improve
Australia's corporate law as part of its drive to promote business
and economic development.2 That program released
discussion papers on six issues:
- accounting standards
- directors' duties and corporate governance
- electronic commerce, and
- financial markets and investment products
On 9 April 1998, the Treasurer released draft
legislation in the areas of:
- accounting standards, and
- director's duties and corporate governance
to implement the proposals for reform contained
in the discussion papers. Interested parties had until 21 May 1998
to make comments on the draft legislation.
The Bill was referred to the Joint Committee on
Corporations and Securities. It was due to report by 10 August
1998, but the Committee was dissolved with the calling of the
October 1998 election.
The Committee was reformed on 8 December 1998
and the Corporate Law Economic Reform Program Bill 1998 has again
been referred to it. The Committee is due to report by 22 April
On 17 September 1998, the Treasurer announced
'Phase Two' of CLERP. The Treasurer said:
CLERP 7 with its focus on reducing the paper
compliance burden of Australian companies, will propose initiatives
that will enable ASIC to make greater use of communications
technology. It will also look at a fundamental overhaul and review
of the large range of paper based documents that the law still
requires companies to lodge.(1)
This Bill deals with the four issues covered by
the draft legislation. Each of those issues is now considered in
Readers seeking further background on the
development of the Corporations law are referred to a series of
four talks given in 1998 by Professor Stephen Bottomley in a DPL
lecture series. Copies of the tapes of these lectures are available
from the DPL Publications Unit (Phone 02 6277 2760 or Fax 02 6277
Chapter 6 of the Corporations Law
regulates takeovers. The policy reflected in the Corporations
Law is that an acquisition which allows the offeror to
influence more than 20% of the voting shares in the target company
should be subject to regulatory supervision. Once the offeror has
reached the 20% threshold, further acquisition should be supervised
until 90% of the target has been acquired.
When reviewing regulatory policy in respect of
takeovers, the Eggleston Committee expressed the opinion that where
there is a proposal pursuant to which an offeror would acquire a
substantial interest in a company, it is necessary to ensure
- the shareholders are fully informed, and in particular that
they have knowledge of the offeror's identity; and
- the shareholders are fully informed of all matters which may be
relevant to the merits of the proposal;
- the shareholders have sufficient time reasonably to assess the
merits of the proposal; and
- as far as practicable, all shareholders have an equal
opportunity to share in any benefits accruing to any shareholder
under the proposal. (2)
These four policy objectives are often referred
to as the Eggleston principles and are reflected in the takeover
provisions of the Corporations Law.(3)
The first three principles protect investors by
ensuring they have sufficient time and information to make a
decision. The fourth principle is referred to as the equality of
The current law
The basic prohibitions are:
- a person who holds less than 20% of the voting shares of a
company must not acquire beyond 20% of the voting shares in the
- a person who holds more than 20% of the voting shares of a
company must not acquire more shares,
unless certain provisions are complied
Pre-bid agreements or understandings between
bidders and target shareholders are prohibited where they would
operate to take the bidder over the 20% threshold.
The principal means of lawfully exceeding the
20% threshold are:
- By making offers under a takeover scheme (section 616 - a Part
A takeover bid). The essential elements of a takeover scheme
- an offer must be made to all shareholders
- the offer must be an offer to purchase all the shares of the
shareholder or a proportion of those shares, being the same
proportion in respect of each offer
- the offer made to each shareholder must be the same, and
- the offer must be accompanied by 'Part A' statement which
contains certain prescribed information and is intended to supply
the offeree shareholders with information to assist them to decide
whether to accept the offer. Significantly, the Part A statement
must include all information 'material to the making of a decision
by an offeree whether or not to accept an offer, being information
that is known to the offeror and has not previously been disclosed
to the holders of shares in the target company'.(5)
- By making offers under takeover announcement (a Part C bid).
The procedure under a takeover announcement is that a stockbroker
for the offeror makes an announcement to the market that after 14
days the broker will stand in the market for a month and will
acquire all shares of the stated class of target shares which are
made available by sellers at the price specified in the
announcement (section 617).
On the day of the takeover announcement, a Part
C statement is to be served on the target company with copies to
the Australian Stock Exchange and the ASIC. The Part C statement is
intended to provide offeree shareholders with information material
to their decision whether to accept the bid.
- By acquiring not more than 3% of the voting shares of a target
in any period of 6 months (section 618)
- By making the acquisition after a resolution has been passed at
a general meeting of the company to approve that acquisition
Note that the prohibition and the takeover
regime only apply in respect of shares in a company. They do not
relate to any other type of security, e.g. options or convertible
Takeover of unit
The basic prohibition in section 615 deals with
'shares'. The term does not include other forms of security such as
managed investments (also referred to as 'collective investments').
Consequently Australian takeover law does not apply to takeover
bids for a listed or unlisted unit trust.(6)
In their joint report entitled Collective
Investments: Other People's Money, the Australian Law Reform
Commission and the Companies and Securities Advisory Committee
recommended a review of whether Chapter 6 should be extended to
collective investment schemes including unit trusts. In its report
on takeovers the Simplification Task Force concluded that a case
for the application of the Chapter 6 rules to collective investment
schemes had not been made out. An explanation of the reasons behind
the Simplification Task Force taking this view are beyond the scope
of this digest, but readers who are interested should contact the
In April 1997, the Financial System Inquiry
recommended that takeover provisions should apply to public unit
CLERP has proposed that the takeover provisions
of the Corporations Law should apply to listed managed
investment schemes subject to appropriate modifications. The
Government's reasons for this can be summarised as follows:
- Managed investment schemes and public companies often perform
substantially the same activities and it is anomalous that
acquisition of shares is subject to the takeover provisions but the
acquisition of units in a listed scheme is not.
- From an investor's perspective, there is little difference
between holding units in a scheme or shares in a company. Although
a unit is legally very different from a share, the rights attached
to units often approximate the rights attached to shares.
- The management of a scheme is usually conducted by the manager
in a fashion which is closely analogous to the management of a
company by its directors.(8)
The Corporations and Securities
The provisions of the Corporations Law
regulating takeovers are enforced and administered by the Federal
and Supreme Courts. Applications for interim and final injunctions
form the bulk of litigation. The target or rival bidder will often
allege that the bidder's Part A or Part C statement (referred to
above) is misleading.
The role of the Corporations and Securities
Panel (Panel) is to intervene at the request of the ASIC where
parties to any acquisition of a 'substantial interest' in a company
engage in conduct which may be strictly within the specific
takeover provisions of the Corporations Law, but is not
within the spirit of the law.
Sections 732-735 of the Corporations
Law deal with unacceptable circumstances in relation to an
acquisition of shares or conduct engaged in by a person in relation
to shares in, or the affairs of, a company. The Panel has the
power, upon application made to it, by the ASIC, to declare certain
acquisitions of shares to be unacceptable and certain conduct in
relation to the shares of, or the affairs of, a company to be
If the panel makes a declaration, it then has
the power to make a wide range of orders to protect the rights of
person affected by the unacceptable acquisition or conduct. The
orders include orders of divestment, suspension of voting rights,
cancellation of agreements and various kinds of restraining
A few of examples of unacceptable circumstances
- the shareholders and directors of a company did not know the
identity of a person who proposed to acquire a substantial interest
in the company
- the shareholders and directors of a company were not supplied
with enough information for them to assess the merits of a proposal
under which a person would acquire a substantial interest in the
- the shareholders of a company did not all have reasonable and
equal opportunities to participate in any benefits accruing to any
shareholder in connection with the acquisition by any person of a
substantial interest in the company.
The Panel is required to conduct its proceedings
with as little formality and in as timely a manner as is consistent
with the proper discharge of its functions. It is not bound by the
rules of evidence. Only three matters have been referred to the
Panel since its inception.
Section 615 requires that a person's entitlement
to a percentage of the voting shares be measured. In calculating
the percentage, each voting share has the same weight as every
other voting share. A problem will arise where a company has two
classes of shares, where one class carries a right to one vote per
share and the other class carries a right to more than one vote per
If, for example, a company has 2000 shares,
divided into 1800 class 'A' shares bearing one vote each and 200
class 'B' shares bearing 10 votes each, an offeror who acquires all
of the class 'B' shares will acquire effective control (2000 out of
3800 votes) but will only be entitled to 10% of the voting shares
and therefore section 615 will not be attracted.
Australian Stock Exchange listing rules 6.8 and
6.9 prevent a listed company from issuing fully paid shares
otherwise than with voting rights on a one-for-one basis. However,
the Corporations Law does not prevent an unlisted company
from creating differential voting rights. Therefore, if the target
is an unlisted company or the ASX waives listing rules 6.8 and 6.9
, the company will be able to issue shares with weighted voting,
the acquisition of which might cause control to pass without
compliance with the principles of equality of shareholder
In 1996 the Simplification Task Force
recommended that relevant interests and acquisitions be measured by
the number of votes attached to shares a person controls, rather
than the number of voting shares.
Compulsory and enforced
Section 701 of the Corporations Law
establishes a procedure whereby, after making a takeover bid, the
offeror may proceed to acquire compulsorily the outstanding
The following requirements must be satisfied in
order that the offeror may proceed to compulsory acquisition:
- the offeror must have made takeover offers under a full
takeover scheme (i.e. not a partial bid) or under a takeover
- the number of shares in the relevant class to which the offer
is entitled must have become not less than 90%;
- the 90% threshold must have been reached during the takeover
- if, prior to making takeover offers under the scheme or making
a takeover announcement, the offeror is already entitled to more
than 10% of the shares in the relevant class, the offeror must
satisfy either of the following:
- 75% of the offerees have disposed of their shares to the
- 75% of the registered holders immediately before the day on
which the Part A statement was served or the takeover announcement
was made are not so registered at the end of one month after the
end of the offer period.
A number of anomalies have arisen under section
- the section may only be used for the compulsory acquisition of
shares and is not available for options or convertible notes or an
other type of securities
- the procedure is not available if the offeror is initially
entitled to more than 90% of the target's shares, and
- because both of the 75% tests are based on number of
shareholders without regard to the value of shareholdings, the
tests can be manipulated by bidders and offeree shareholders by,
for example, transferring numerous small parcels to
Section 703 provides that an offeror who has
served a Part A statement or caused a takeover announcement to be
made can be required to purchase shares in the same class once the
number of shares to which the offeror becomes entitled reaches
The terms on which the remaining shares are to
be purchased are:
- the terms applicable immediately before the expiration of the
- agreed terms; or
- such terms as the court, on the application of the offeror or
shareholder, thinks fit to order.
Where, during the takeover period the offeror
becomes entitled to not less than 90% of the voting shares
of the target company, the holders of non-voting shares,
renounceable options and convertible notes become entitled to force
the offeror to acquire their shares, options or notes.
It is curious that whilst renounceable option
and convertible note holders may require acquisition of their
holdings, there is no corresponding right on the part of the
offeror to compulsorily acquire those holdings. The Report by
the Leal Committee on Compulsory Acquisitions recommended that
the right of enforced acquisition under section 703 should be
limited to remaining securities of the bid class and other
securities convertible into the bid class. (9)
Item 5 of Schedule
1 repeals existing Chapter 6 of the Corporations
Law and replaces it with the new takeover provisions.
Proposed new section 602 sets
out the purposes of the Chapter. Amongst other things that
provision restates the Eggleston principles.
Proposed new section 604
extends the operation of the takeover provisions to the acquisition
of an interest in a listed managed investment scheme.
The basic prohibition on acquiring voting shares
beyond the 20% limit or from a number above the 20% limit to less
than 90%, is contained in proposed new section
The prohibition differs significantly from the
current prohibition in that the limitation is based on voting power
not merely the number of voting shares in the company. This will
cater to the circumstance where different classes of shares have
more than one vote attached to them and will overcome the problem
raised under the heading 'Super-voting shares' above. To this
extent proposed new section 610 provides that a
person's voting power is:
Person's and associates' votes x 100
Total votes in the body corporate
The person's and associates' votes is the total
number of votes attached to all the voting shares in the body
corporate that the person or an associate has a relevant interest
The exceptions to the prohibition are set out in
proposed new section 611.
The primary exception to the prohibition is an
acquisition that results from a takeover bid. The note to
proposed section 616 is important. It provides
that although the prohibition under proposed new section
611 only relates to acquiring voting shares, a takeover
bid in accordance with Chapter 6 may be made for any securities. At
present, a takeover bid may only be made in respect of shares.
The notable addition to the list of exceptions
is exception 5 which introduces a 'mandatory bid' rule. This will
permit a person to make one acquisition of shares which takes them
above the 20% limit provided that acquisition is immediately
followed by the announcement of a full unconditional takeover bid
for all the securities in that class. The primary benefit of the
mandatory bid rule is the increased certainty of the outcome of the
bid. It will put a prospective bidder in a position to ensure that
it has control (i.e. more than 20% of the voting power) of the
company before it makes an outright takeover bid.
The primary disadvantage of the mandatory bid
rule is the potential for eliminating the competitive market for
corporate control. At present, in the absence of a mandatory bid
rule, a takeover bid by one person is often followed by one or more
rival bids which results in the opportunity for an auction for
control. An auction facilitates price competition in the market by
compelling a bidder to pay an amount at least as high as others
are, or might be, willing to pay.
Proposed new section 621(4)
requires that the price offered under any takeover bid must be an
amount at least equal to the highest price paid by the bidder in
the last four months.
The Corporations and Securities
The role of the Corporations and Securities
Panel is to be significantly enhanced. The enhancements are as
- an application to the Panel may be made by the bidder, the
target, the ASIC or any other person whose interests are affected,
rather than just by the ASIC as at present (proposed new
- applications will seek a declaration by the Panel that
circumstances in relation to the affairs of a company are
unacceptable. The Panel may declare circumstances to be
unacceptable whether or not they constitute a contravention of the
Corporations Law (proposed new section
- whether circumstances constitute unacceptable circumstances is
determined having regard to the Eggleston principles (as set out in
proposed new section 602) and any other matters
that the Panel considers relevant (proposed new section
- the Panel may refer questions of law to a Court for decision
(proposed new section 659A).
- if the Panel makes a declaration, it may make any order that it
thinks appropriate (proposed new section
- only the ASIC will be able to commence court proceedings in
relation to a takeover bid from the time the bid is announced until
the end of the bid period. Consequently all proceedings in relation
to the takeover bid will need to be commenced before the Panel.
Courts will be empowered to stay any proceedings that would have a
significant effect on the progress of a takeover bid until the end
of the bid period (proposed new section
Compulsory and enforced
Following a takeover bid
Proposed new section 661A sets
out the circumstances in which a bidder may compulsorily acquire
- the takeover bid must have been for all the securities in the
- the bidder must have at least 90%, by number, of the securities
in the bid class, and
- the bidder must have acquired at least 75%, by number, of the
securities that the bidder offered to acquire under the bid.
The new provision implements a couple of
- any class of securities may be compulsory acquired, provided
that acquisition is preceded by a takeover bid for that class. At
present, only shares can be compulsorily acquired, and
- The '75% test' is applied to the number of shares rather than
the number of shareholders.
Proposed new sections 662A and
662C restate the right of a security holder to
force a person who holds at least 90% of the securities in that
class, to acquire his or her securities. Proposed new
section 663A and 663C extend this right to the holders of
securities which are convertible into securities of which the
person holds at least 90%.
Not following a takeover bid
Where a person holds 90% (by number) of the
securities in a particular class, that person may compulsorily
acquire all of the remaining securities in that class
(proposed new section 664A). This is subject to
the right of the holders to object to the acquisition. If at least
10% (by value) of the minority holders object, the acquirer must
obtain Court approval for the acquisition if he or she wishes to
proceed with it.
If the acquirer establishes that it is offering
a fair value for the securities, the Court must approve the
acquisition. The acquirer must pay the legal costs of the minority
holders, unless they have acted unreasonably or vexatiously
(proposed new section 664F).
Proposed new section 664A is
not entirely new. Section 414 of the Corporations Law
currently provides a similar procedure.
A person who becomes a holder of 100% of a
particular class of securities, as a result of the provisions
dealing with compulsory acquisitions which are not made subsequent
to a takeover bid, must offer to acquire all other classes of
securities which are convertible into securities of that class
(proposed new section 665A).
The primary focus of the fundraising provisions
of the Corporations Law is to ensure that investors in
newly issued securities of a corporation, other than those who are
in a strong enough position to look after themselves, have access
to the information which a reasonable investor would require for
the purpose of making an investment decision.
Capital is needed to establish a business and a
prospectus provides material information about the relevant
When must a prospectus be
Whenever an offer or invitation to subscribe for
securities is made, a prospectus is required to be:
- prepared in accordance with the form and content requirements
of the Corporations Law
- lodged with the ASIC except in certain circumstances,and
- registered by the ASIC except in certain circumstances,
unless the offer or invitation is exempt.
The Corporations Law provides a number
of specific exemptions from the requirement to use a prospectus
when issuing securities. In general, the exemptions are intended to
ensure that the efficient operation of the securities markets is
not unreasonably impeded by the onerous requirement to prepare and
use a prospectus. These exemptions are properly referred to as
'excluded offers' and 'excluded invitations'. Two of the most
significant exemptions are:
- where each person receiving the offer or invitation is invited
to subscribe or pay at least $500,000 for the relevant securities
(referred to as the 'sophisticated investor exception'), and
- where no more than 20 personal offers or invitations to
particular persons are made during any 12 month period (referred to
as the '20 in 12 rule').(11)
Contents of a
The general disclosure obligation is that a
prospectus must contain all such information as investor and their
professional advisers would reasonably require, and reasonably
expect to find in the prospectus, for the purpose of making an
informed assessment of:
- the assets and liability, financial position, profits and
losses, and prospects of the corporation, and
- the rights attaching to the securities.(12)
Liability for contents of the
Section 52 of the Trade Practices Act
1974 provides that a corporation shall not, in trade or
commerce, engage in conduct that is misleading or deceptive.
Section 995 of the Corporations Law is
almost identical to section 52. The difference is that section 995
specifically refers to 'conduct in connection with any dealing in
Under both sections 52 and 995, the question
whether conduct is misleading or deceptive is assessed objectively
and does not take into account the intention of the person who
engages in the conduct. Consequently, if the defendant has
distributed a prospectus which is in fact false, and an investor
suffers loss by that contravention, it is no defence to demonstrate
that the defendant believed that the prospectus was true and took
all reasonable precautions to avoid error and to verify prospectus
Liability may also arise under the State and
Territory Fair Trading Acts.
Section 996 of the Corporations Law
makes it an offence for a person to authorise or cause the issue of
a prospectus in relation to securities of a corporation if:
- a material statement in the prospectus is false or misleading,
- there is a material omission from the prospectus.
In a prosecution under section 996, a defendant
may avoid liability by proving that after making such inquiries as
were reasonable the defendant had reasonable grounds to believe and
did until the time of the issue of the prospectus believe that:
- the statement was true and not misleading or the omission was
not material, or
- where there was an omission from the prospectus, the omission
A person who suffers loss as a result of a
contravention of section 995 or 996 can recover that loss from 'any
person involved in the contravention'.(14) That expression is very
wide and includes the corporation, directors of the corporation,
promoters of the corporation and professional advisers.(15) It is
unclear whether professional advisers are liable only for
statements attributed to them in the prospectus or for all parts of
the prospectus which they have advised or assisted on.
The basic premise that an offer of securities
for issue requires disclosure of certain information to prospective
investors, remains unchanged (proposed new section
Is a disclosure document
necessary and if so, what type?
It continues to be the case that a disclosure
document is necessary where there is an offer of securities for
issue unless the offer falls within one of the exemptions. There
are a number of exemptions, but only two warrant discussion:
- the 20 in 12 rule (i.e. 20 individual offers in 12 months)
mentioned in the background above has been continued but modified
significantly in 2 respects:
- the limitation will be imposed on the number of issues, i.e.
there can be any number of offers made but only 20 issues of
securities can be made within the 12 month period.
- the amount that can be raised under this exemption will be
limited to $2 million per year.
- the sophisticated investor exception will also be continued but
will be extended. In addition to applying where the amount payable
for the securities is at least $500 000, it will apply where:
- the investor has net assets of at least $2.5 million, or
- the investor has a gross income for each of last 2 financial
years of $250 000, or
- the offer is made through a licensed securities dealer and that
dealer is satisfied that the investor has experience in investing
that allows them to assess the merits of the offer and the risks
involved (proposed new section 708).
If an offer of securities does not fall within
one of the exemptions set out in proposed new section
708, then a prospectus must be prepared unless the amount
being raised is less than $5 million. If the amount being raised is
less than $5 million, an offer information statement (OIS) may be
used to offer the securities. A body may not raise more than a
total of $5 million under an OIS in its lifetime (proposed
new section 709).
Types of disclosure documents
and their contents
If an offer of securities needs disclosure a
prospectus must be prepared unless the offer is one which may be
made using an offer information statement.
The requirement for the content of a prospectus
continues to be:
all the information that investors and their
professional advisers would reasonably require to make an informed
- the rights and liabilities attaching to securities; and
- the assets and liabilities, financial position and performance,
profits and losses and prospects of the body that is to issue the
shares, debentures or interest (proposed new section
At present, documents can be incorporated into a
prospectus by reference if:
- the document has been lodged with the ASIC (as a document which
is required or permitted to be lodged, i.e. not just any document
can be lodged with the ASIC)
- the prospectus includes a summary of the document, and
- the prospectus includes a statement that the issuer will
provide a copy of the document free on request.(16)
Proposed new section 712
permits documents lodged with the ASC to be incorporated by
reference but omits the requirement that the prospectus contain a
summary of the document. The prospectus need only identify the
document. The new provision permits the lodgement of any document
with the ASC, so that it may be incorporated by reference.
The Financial System Inquiry recommended that a
profile statement be required for all prospectuses and that
investors be permitted to invest solely on the basis of this
statement.(17) The inquiry envisaged that a profile statement would
- an outline of the nature of the investment
- the standard charges for purchasing and selling the
- the risks involved in the investment, and
- other disclosures for specific products considered appropriate
by the regulator.
The Bill provides that a profile statement may
be prepared in addition to the prospectus where ASIC has
approved the making of offers of that kind or the offers of
securities of that kind with a profile statement (proposed
new section 709). In no circumstance is there an
obligation to prepare a profile statement.
Investors will be permitted to invest solely on
the basis of the profile statement (proposed new section
Among other things, the profile statement will
need to include a statement of the nature of the risks involved in
investing in the securities and a statement that the person is
entitled to a copy of the prospectus free of charge
(proposed new section 714).
Offer information statement
The significant matters which must be included
in an OIS are:
- the identity of the body and the nature of the securities
- a description of the body's business
- a description of what the funds are to be used for
- a statement that the OIS is not a prospectus and that it has a
lower level of disclosure requirement than a prospectus
- a statement that investors should obtain professional
investment advice before accepting the offer, and
- an audited financial report for the period ending no earlier
than 6 months ago.
The simplified liability
The Bill simplifies the current liability regime
for disclosure documents in a number of respects:
- it clarifies that professional advisers will only be liable for
statements which are included in a disclosure document with their
consent (proposed new section 729).
- it provides a uniform due diligence defence for all parties,
i.e. the corporation, directors, underwriters, experts and
advisers. If the statement is contained in a prospectus, they must
prove that they made all reasonable inquiries and after doing so
believed on reasonable grounds that the statement was not
misleading or deceptive. If the statement was contained in a
profile statement or OIS, they must prove they did not know the
statement was misleading or deceptive (proposed new
sections 731 and 732).
- at present, where a prospectus contains a forecast, it is
deemed to be misleading unless the maker of the statement has
reasonable grounds for making it.(18) This Bill reenacts that law
(proposed new section 728(2)). Furthermore, the
maker of the statement is taken not to have had reasonable grounds
for making the statement unless they can produce evidence to the
contrary, i.e. the onus is on the maker of the statement to prove
their were reasonable grounds for making the statement.(19) This
Bill removes this onus, so that a person alleging that a forecast
was misleading will need to prove an absence of reasonable grounds
for making the statement.
- the potential for liability to arise because of a statement in
a disclosure document under section 995 of the Corporations
Law or the State/Territory Fair Trading Acts (see background
above) will be removed (Schedule 3, items 24, 57
and 59). The aim is to provide a self-contained
liability regime in the Corporations Law for dealings in
securities(20). However, it appears that liability can still arise
for a corporation under section 52 of the Trade Practices Act
The current law prohibits advertising a proposed
offer of unlisted securities until a prospectus has been lodged and
registered by the ASC. After a prospectus has been lodged and
registered, advertising is permitted provided it contains specific
details drawing attention to the availability of the prospectus.
Proposed new section 734permits
the advertising of basic information of a proposed offer before
lodgement of the disclosure document.
Preparation of financial
Public companies, large proprietary companies
and registered managed investment schemes are obliged to prepare
financial statements each year.(22) Copies of those statements must
be provided to every member of the company or scheme.(23)
Those financial statements must provide a true
and fair view of the financial position and performance of the
company or scheme and must comply with Australian accounting
An accounting standard is a prescription of the
acceptable method of measuring and recording specific types of
accounting transactions, and of the required level of disclosure
about those transactions in the financial statements of an
Australian accounting standards for entities
other than companies and registered managed investment schemes are
issued by the Australian Accounting Research Foundation (AARF), a
body sponsored by the Australian Society of Certified Practising
Accountants and the Institute of Chartered Accountants in
Australia. Australian accounting standards for companies are issued
by the Australian Accounting Standards Board (AASB) and are given
legislative force by the Corporations Law.(26)
International accounting standards are issued by the International
Accounting Standards Committee.
Australian Accounting Standards
The AASB sets accounting standards for companies
and registered managed investment schemes. The AASB works with the
Public Sector Accounting Standards Board (PSASB) on the development
of standards for use by public sector non-Corporations Law
The AASB has ten part-time members who have been
appointed for three year terms by the Treasurer.
The AASB and PSASB are provided with
administrative and research support by the AARF.
It is proposed that the standard setting process
be restructured to provide for:
- an advisory group, to be known as the Financial Reporting
Council (FRC), to oversee the standard setting process. The FRC
will not have day-to-day control over the standard setting
body. The FRC will be responsible for:
- broadly overseeing the standard setting process and determining
the strategic direction of the new Australian Accounting Standards
Board (new AASB)
- appointing members of the new AASB (other than the Chairman who
will be appointed by the Treasurer)
- approving and monitoring the priorities, budget and staffing
arrangements of the new AASB
- monitoring the development of international accounting
standards and furthering the harmonisation of Australian accounting
standards with international standards.
- a new AASB will be formed. This new body differs from the
existing AASB in three significant respects:
- its operations will be overseen by the FRC
- it will be a body corporate
- one of its functions will be to participate in the formulation
of international accounting standards.
For the year ended 30 June 1997, the AASB's
operating costs totalled $1 312 000, being the Chairman's
remuneration, members' sitting fees, accommodation, travel and
meeting costs, costs involved with international liaison and the
cost of AARF services. Those costs were met by:
- Parliamentary appropriations of $885 000
- contribution by the AARF of $177 000, and
- contribution by the Australian Stock Exchange of $250,000.
It is proposed that funding for accounting
standard setting will, emanate from stakeholder organisations,
- the business sector, as preparers and users of financial
- the accounting profession and analysts, and
- the public sector and regulators - both on public interest
grounds and as preparers and users of financial reports.(27)
The FRC will be charged with overseeing funding
arrangements and securing funding agreements with the various
stakeholder organisations, including government.
The government has estimated that funding of $10
million over the next three years will be needed to achieve the
objectives set for the FRC and AASB.
Schedule 2 of the Bill amends
the Australian Securities and Investments Commission Act
1989 by repealing existing Part 12 which establishes the
existing Australian Accounting Standards Board and replacing it
with a new Part 12 which deals with accounting standards.
The new Part 12:
- establishes the Financial Reporting Council (see above)
- establishes the new AASB, and
- sets out a framework within which the new AASB is to formulate
That framework includes a requirement that the
new AASB carry out a cost/benefit analysis of the impact of a
proposed accounting standard before making the standard
(Proposed new section 231).
The directors' duties and corporate governance
aspects of this Bill are aimed at improving corporate governance in
Australia and promoting effective corporate decision making which
is currently hampered by legal uncertainties arising from potential
liabilities of directors for their actions. It is argued this acts
to discourage innovation and responsible risk-taking.
There has been significant debate in Australia
since the 1980's concerning the standard of corporate governance.
Shareholder groups have called for greater accountability by
directors and directors have demanded greater certainty in respect
of their potential liabilities.
There have been recent and notable corporate
civil litigation cases which have seemingly expanded the
liabilities of directors by refining the concept that the duty to
exercise care and skill is based as much on the common law duty of
care as on the directors' fiduciary relationship to the
company.(28) This has apparently caused directors to be more
cautious and compliance focused in the execution of their duties
than was previously the case.
Chapters 2D and 2E of the Corporations
Law are repealed and replaced with those amendments referred
to in Schedule 1 of the Bill as the "Main amendments of the
To facilitate reform in the corporate governance
area it is proposed to introduce:
- a statutory business judgment
rule which would offer directors a safe harbour from
personal liability for breaches of the duty of care and diligence
in relation to honest, informed and rational business judgments. It
is not intended to protect directors in cases of negligent, ill
informed or fraudulent decisions; new section 180
- a statutory derivative action to
enable shareholders or directors of a company to bring an action on
behalf of the company, in situations where there is a serious
question to be tried and it is in the best interests of the company
for the action to be brought and the company is unwilling or unable
to do so; new sections 236 to 242 inclusive
- authority for the delegation of director's
powers subject to any constitutional restrictions of
the company; new sections 190 and 198D
- authority for directors to rely on advice or
information provided by others so long as the
director believes on reasonable grounds that the person is reliable
and competent in relation to the matters concerned; new
- a right of access for directors to company
books at all reasonable times for the purposes of
certain legal proceedings; new section 198F
- clarification of the duty of directors of wholly
owned subsidiaries in situations of conflict of
interest so that a director of a corporation will be
taken to act in good faith in the best interests of the subsidiary
if the constitution authorises the director to act in the best
interests of the holding company and the subsidiary is not
insolvent; new section 187
- a reformulation of the duty to act
honestly so that a contravention of the requirements
relating to good faith, use of position and use of information will
be criminal offences only if dishonest and committed intentionally
or recklessly. Breaches of these duties not involving dishonesty
will attract civil penalties; new sections 181, 182, 183
- certainty in relation to the restrictions on
indemnities and insurance for officers and auditors
against liabilities (other than for legal costs) and liabilities
for legal costs incurred as an officer or auditor of a company.
new sections 199A, 199B and 199C
1. Statutory Business Judgment
The amendments to the Corporations Law
to introduce the business judgment rule are found in new
Chapter 2D, Section 180 concerning the care and diligence
of directors and other officers.
The introduction into the Corporations
Law of a business judgment rule has been considered and
recommended by various Committees.(29)
A statutory formulation of the business judgment
rule would substantiate the position at common law that Courts are
loath to review the merits of a decision on a matter of business
management.(30) It would also, unlike the common law, provide a
clear presumption in favour of a director's judgment where such
decisions have been taken in good faith and in the company's
The intention is that the proposed provision
would result in the Corporations Law setting out, not only
the duty of care and diligence of directors, but also an explicit
safe harbour for directors. They would know with some certainty
that, if they fulfilled the requirements of the new section
180, they would effectively be shielded from liability for
any breach of their duty of care and diligence.
Comments - Issues for Discussion
The decision not to link the business judgment rule with
the derivative action provisions may limit the safe harbour
purportedly created by the Bill for directors.
The proposal to introduce a statutory derivative
action, together with the decision not to link the business
judgment rule to those derivative action provisions may combine to
jeopardise or limit the safe harbour for directors.
Underlying the business judgment rule is the
presumption that in making a business decision the directors' acted
on an informed basis, in good faith, without material personal
interest and in the rational belief that the action taken was in
the best interest of the company. When applied, the rule
purportedly precludes the courts from reviewing the merits of a
decision taken by the directors on a business matter even when the
results later show that what the directors did was unwise or
The statutory derivative action concerns the
bringing, or intervening in, proceedings on behalf of a company.
There is a rebuttable presumption that granting leave to bring or
to intervene in proceedings is not in the best interests of the
company, and therefore will not be permitted, in situations
relating to proceedings by the company against a third party or by
a third party against the company.
The potential problem of course, relates to
those business decisions that do not relate to proceedings with
third parties and are not, therefore, the subject of the rebuttable
presumption.(32) Situations may therefore arise where the business
judgment rule would apply but the derivative action rebuttable
presumption may not. The effect could be that the intended
injection of confidence into boardroom decision-making could be
limited, constrained by the doubts raised due to the fact that
there is no direct link between the statutory business judgment
rule and derivative action.
Further legislative guidance may be required with
respect to the definition of "business operations"
It is also intended that the operation of the
business judgment rule will be confined to cases which involve the
taking of decisions involving the ordinary business operations of
the company of the type expressly mentioned by the Companies and
Securities Law Review Committee (CSLRC) in its proposed draft
The CSLRC, however, believed that it was
necessary to provide some legislative guidance as to the content of
the expression "business operations".
Whether the subsection, as currently drafted,
could be construed as applying to decisions in relation to such
matters as insolvency, transactions involving changes in corporate
control and constitutional matters, which are intended to be beyond
the operation of the rule, is a matter for conjecture.
The special circumstances of Non-Executive Directors may
not have been adequately provided for when considering
responsibilities under the statutory duty of diligence and
In the discussion papers circulated by the
Government concerns expressed in the business community regarding
implications for the standard of care and diligence of
non-executive directors were recognised. (33)It was suggested that
the special background, qualifications and position within the
corporation of the particular director could be taken into account
in evaluating their compliance with the standard of care and
Amendments to subsection 232(4) of the
Corporations Law proposed in the initial discussion
papers, which would have specifically indicated that a director
must discharge their duties with the degree of care and diligence
that a reasonable person would exercise if they had the director's
experience, powers and duties, have been omitted.
New subsection 180(1) states
that a director must discharge his duties with the degree of care
and diligence that a reasonable person would exercise if they
occupied the office held by, and had the same responsibilities
within the company as the director. The word 'responsibilities'
could take into account a director's powers and duties but it is
unlikely that it would take into account the director's experience
and qualifications. For this reason it does not appear that
new subsection 180(1) has adequately addressed
concerns of non-executive directors.
2. Statutory Derivative
The amendments to the Law to introduce the
statutory derivative action are found in new Chapter
2E, commencing at section 236 concerning
the bringing, or intervening in, proceedings on behalf of a
The introduction into the Corporations
Law of a statutory derivative action has been considered and
recommended by various Committees.(34)
In the majority of companies, the powers of
management are expressly vested in the board of directors by the
constituent documents of the company. The power to initiate,
prosecute, settle or otherwise deal with legal proceedings by a
company ordinarily resides in the board of directors as the primary
organ of management.
The general consensus of the Committees appears
to be that without clear statutory procedures, pursuing derivative
actions will continue to be an uncertain enterprise surrounded by
The aim of the provisions is to make a
derivative action more feasible and practical than under the common
law, thus accommodating shareholder calls for greater
accountability by directors.
Comments - Issues for Discussion
Ratification of conduct by the general meeting of a
company will not act as a bar to the granting of an application to
take derivative proceedings.
New section 239 states that
ratification or approval of conduct by the members of a company
does not prevent a person from applying to bring or intervene in
proceedings on behalf of the company in relation to that
This position is in conflict with the view
expressed by the CSLRC which considered that a bar to derivative
action following ratification of conduct by the general meeting
would have the effect of providing encouragement and certainty to
managers in the performance of their duties. (36)
In line with its view that there should be
legislative recognition of the ability of a company in general
meeting to give advance authority for specific conduct of an
officer of a company and ex post facto release after the occurrence
of a breach of duty, the CSLRC recommended that uncontradicted
evidence of a valid resolution of the company in general meeting
(held under certain conditions) should also act as a bar to the
granting of an application to take derivative proceedings.
The Government has indicated that it is
concerned that purported ratification by a majority of shareholders
could deny the company as a whole, and hence minority shareholders,
any right of action against the directors. The recommendations have
not therefore been adopted.
The contrary argument is that there are
currently provisions in the Corporations Law, sections
246A and 246AA, which provide remedies to a member of a company in
relation to maladministration of the affairs of a company.
A compromise position may be to insert a
rebuttable presumption that granting leave is not in the best
interests of the company if the members of the company ratify or
approve conduct, are well-informed and acting for proper
Is the proposed statutory derivative
action a duplication of an existing remedy?
CSLRC received submissions indicating that
former section 320 of the Corporations Law (subsequently
section 260 of the Corporations Law and now sections 246A
and 246AA of the Corporations Law) already could provide
derivative standing of the type envisaged by the proposed statutory
derivative action in new section 236.(37)
The consequence of this may be confusion as to
which provision is the appropriate one under which to proceed in
any given set of circumstances.
The CSLRC considered this argument and concluded
that it was not prepared to assert that section 320 was a true
derivative provision because the relevant issue does not appear to
have been decided authoritatively by the Courts.
The intention is for the provisions concerning
oppressive conduct of affairs to stand side by side with the
derivative action provisions.
The Court itself is not empowered to substitute another
person for the person granted leave under the new section
New section 238 authorises
members and officers (present and past) to apply to the Court for
an order that they may be substituted for the person to whom leave
has been granted for the derivative action. The Court is not
specifically given the ability to initiate substitution in the new
The CSLRC in its discussion of a statutory
derivative action recommended that the Court itself be provided
with the ability to substitute applicants to ensure the proper
carrying out of the proceedings. There is valid reason to give the
Courts such powers. The suitability of the applicant may not be in
question at the time of the hearing for the application but later
events may compromise or negate the ability of the applicant to
prosecute the proceedings.
Without specific inclusion of provisions
enabling Court initiated substitution in new section
238 it will be necessary to rely upon the Court's general
powers in new section 238 for such orders to be
made. It may be that such powers should not be left to
The new derivative action provisions may impose an
obligation on the Courts to involve themselves in reviewing
management decisions -something the Courts are loath to do and is
inconsistent with the new statutory business judgment
A Court must grant an application under the
derivative action provisions if, amongst other things, the Court is
satisfied it is in the best interests of the company that the
applicant is granted leave.
In the normal course this would allow the Court
to focus on the true nature and purpose of the proceedings.
It would allow, for example, the Court to decide
that the directors had sound business reasons for not taking action
and therefore leave would not be granted.
The business judgment rule is not linked to the
statutory derivative action provisions. Without the linking of the
business judgment rule to the statutory derivative action the Court
would have to decide if the business decision was sound. This
involves a consideration of the merits of the business decision
It is widely accepted that the Courts have
neither the expertise nor the time to become involved in such
determinations. Linking the business judgment rule to the statutory
derivative action would, for the most part, obviate the need for a
Court to review the merits of a business decision.
3. Delegation of Director's
The amendments to the Corporations Law
that allow directors to delegate powers are found in new
Chapter 2D, sections 190 and 198D.
Uncertainty has been created by the contrasting
approach the Courts have taken to the ability of directors to
delegate functions and rely upon the judgments of others.(38)
New section 198D seeks to
overcome the uncertainty in relation to delegation by providing
specific legislative authority for the directors of a company to
delegate their powers to a committee of directors, a director, an
employee of the company or any other person. (Such delegation must
be noted in the company's minute book).
New section 190 states that
where a delegation is made a director is responsible for the
exercise of that power as if they had exercised it themselves,
unless the director believed on reasonable grounds, in good faith
and after making proper inquiry if necessary, that the delegate was
reliable and competent.
4. Reliance on Advice or
Information Provided By Others
The amendment to the Corporations Law
that allows directors to rely on advice or information provided by
others is found in new Chapter 2D, section
New section 189 provides that a
director's reliance on information or professional or expert advice
will be reasonable if the reliance was made in good faith and after
making proper inquiry if the circumstances indicated the need for
The protection afforded by new section
189 is limited to proceedings brought to determine whether
a director has performed a duty under Part 2D.1 or an equivalent
general law duty. The phrase "general law" means the principles and
rules of the common law and equity.
Part 2D.1 sets out the most significant duties
of directors including general duties of care, diligence and good
faith, duties of disclosure and duties to disclose certain trust
5. Access to Company
The amendment to the Corporations Law
that allows directors access to company books is found in
new Chapter 2D, section 198F.
At common law a director has a right of access
to all company information necessary to discharge his or her
duties. This right to access is, however, questionable where it may
be seen that the director is not using the information for the
purposes of the company.
New section 198F affords a
director (current and retired) a right to inspect and make copies
of the company's books for the purpose of certain legal
proceedings. The section does not limit any right of access to
company books that a director has apart from the section.
The right in new section 198F
is limited to legal proceedings to which the director is a party,
proposes in good faith to bring or believes will be brought against
6. Directors of Wholly Owned
Subsidiaries and Conflict of Interest
The amendments to the Corporations Law
to allow directors of wholly-owned subsidiary companies to take
into account the interests of the holding company in formulating
business decisions are found in new Chapter 2D, Section
Where the constitution of a subsidiary expressly
authorises a director to act in the best interests of a holding
company, the director acts in good faith and the subsidiary is not
insolvent the director will be taken to act in the best interests
of the subsidiary.
The notion of a group of companies has created
numerous difficulties in the development of Australian company law.
New section 187 is an attempt to enable directors
of subsidiary companies to behave in a manner expected and
recognised by the commercial community.
Comments - Issues for Discussion
The amendment may be too limited by restricting its
operation to situations where there is a wholly owned subsidiary
Criticism of new section 187 is
that it does not go far enough.(39) Flexibility is denied to
directors of partially (substantially) owned subsidiaries and to
joint venture situations.
The initial proposal by the Government extended
the scope of the proposed changes to a partially owned subsidiary
relationship but requested the subsidiary to have had an
'independent' vote allowing the direction to act in favour of the
holding company. This appeared to be a sensible approach, which had
regard to commercial reality.
There appears, however, to have been a change in
direction in policy, based, it is presumed, on responses received
to the draft indicating that a potential difficulty could be the
holding company being held responsible for the subsidiary company's
debts. The problem involves the possible lifting of the corporate
veil. It is a possibility but one that is more likely in cases
involving fraud and new section 187 requires the
director to be acting in good faith.
Directors of joint venture companies have also
been denied of the protection afforded by the section. The nature
of a joint venture company usually indicates the incorporation into
the founding and constituent documentation of well considered
mechanisms to protect each party's interests. Providing that the
joint venture company was not insolvent at the time a director acts
and did not become insolvent because of the director's act, it is
difficult to imagine that there would not be wide business
community support for the extension of the operation of new
section 187 to cover partially owned subsidiaries and
joint venture companies.
As partially owned subsidiaries and joint
venture companies are excluded from new section
187, it may be necessary to clarify that the current
common law rule, which may in some instances allow a director to
act in the interests of the nominating person, will not be affected
by new section 187 given its restrictive
7. Reformulation of Duty to Act
The amendments to the Corporations Law
that a contravention of the requirements relating to good faith,
use of position and use of information will be criminal offences
only if dishonest and committed intentionally or recklessly are
found in new Chapter 2D, Sections 181,
182, 183 and 184.
Breaches of these duties not involving
dishonesty will attract civil penalties under section 1317DA.
The reason for the amendment is that the concept
of negligence is inconsistent with dishonesty. Dishonesty suggests
an awareness of wrongdoing rather than a failure to exercise
sufficient care and diligence.
8. Restrictions on Indemnities
and Insurance for Directors and Officers
The amendments to the Corporations Law
clarifying restrictions on indemnities and insurance for directors
and officers against liabilities (other than for legal costs) and
liabilities for legal costs incurred as an officer or auditor of a
company are found in new Chapter 2D,
Sections 199A, 199B and 199C.
New subsection 199A(1) states
that a company must not exempt a person from a liability to the
company incurred as an officer or auditor of the company.
('Officer' includes a director).
New subsection 199A(2)
specifies all the circumstances in which indemnification of a
person against liabilities incurred as an officer or auditor of a
company will not be permitted.
New subsection 199A(3)
specifies all the circumstances in which indemnification of a
person against legal costs incurred in defending an action for a
liability incurred as an officer or auditor of a company will not
Pursuant to new section 199B, a
company must not pay a premium for insurance in relation to a
liability arising out of conduct involving a wilful breach of duty
or a contravention of new sections 182 or 183
(which relate to use of position and use of information not
involving dishonesty). In addition new section
199C makes it clear that anything that purports to
indemnify or insure a person against liability is void to the
extent that it contravenes new section 199A or
One of the concerns with the present situation
has been that a person is not entitled to indemnity until the
outcome of proceedings is known by which time a good deal of money
may have been required for legal costs in defending the action.
Currently member approval is required to give a financial benefit
to a director of a public company. New section 212
provides for a situation where a company may give the person a loan
or advance in respect of legal costs without obtaining member
approval. Once the outcome is known the person would either keep
the monies or be obliged to repay them.
Comments - Issues for Discussion
Indemnity for defence costs is not an
In some overseas jurisdictions a director or
officer who succeeds in defending civil proceedings or who is
acquitted in criminal proceedings is given a right against the
company to be indemnified in relation to all costs, charges and
expenses reasonably incurred by the person in respect of his or her
The CSLRC recommended that indemnity in the
Corporations Law in respect of defence costs be elevated
from a right to be considered, which is the current position, to an
absolute right along the lines of the overseas position.(41) This
was based on the view that the indemnity of an innocent director or
officer should not be dependent on the company (whether by the
board or the general meeting) deciding to provide the indemnity.
This seems to be a perfectly sensible and commercially realistic
approach to the question of indemnification for defence costs for a
successful director or officer of a company.
New sections 199A, 199B and
199C do not provide this level of comfort for
Indemnity will not be permitted for
liability for a pecuniary penalty or a compensation
199A(2) states that a company must not indemnify a
person against a liability for a pecuniary penalty or a
compensation order imposed under new sections
1317G and 1317H.
The CSLRC considered this issue and concluded
that it should be open to the company in general meeting to decide
whether to pay the fine or compensation ordered. It also
recommended that there should be no positive statement of
authority, which would act to limit the ability of any member to
complain that any decision to reimburse a director or officer is
not in the best interests of the company.
This would appear to be the better approach
rather than excluding indemnity altogether as the new provisions
Schedule 5 - Consequential
amendment of the Commonwealth Authorities and Companies Act
1. The Commonwealth
Authorities and Companies Act 1997
Application of the Commonwealth
Authorities and Companies Act 1997
The rules in the Commonwealth Authorities
and Companies Act 1997 (the CAC Act) apply to Commonwealth
authorities and Commonwealth companies.
Broadly, the CAC Act provides a single set of
core reporting and auditing requirements for directors of
Commonwealth authorities and a set of standards of conduct for
officers. Many of these requirements are modelled on comparable
areas of the Corporations Law and thus, to the extent
practicable, apply standards and principles applicable to private
For Commonwealth companies, the Act has
reporting and other requirements that apply in addition to the
requirements of the Corporations Law to basically ensure
they keep Ministers and the Parliament informed of their
Section 7 of the CAC Act defines a Commonwealth
authority as a body incorporated for a public purpose by an Act or
by regulation under an Act. It does not include bodies incorporated
under the Corporations Law.
Section 34 defines a Commonwealth company to be
a Corporations Law company in which the Commonwealth has a
2. Conduct of Directors and
Division 4 of the CAC Act governs conduct of
directors and officers of Commonwealth authorities.
Directors and officers of Commonwealth companies
are subject to the provisions regulating conduct under the
Division 4 - Conduct of
Item 11 of Schedule 5 of the
Bill repeals Division 4 and substitutes new Division
New Division 4 contains
new Subdivision A-General Duties, which sets out
some of the most significant duties of directors, officers and
other people who are concerned in, or take part in, the management
of Commonwealth authorities.
The amendments propose to maintain alignment
with the Corporations Law in relation to both directors
and officers duties and civil penalties for breach of duty.
Statutory Business Judgment
Significantly new subsection
22(2) inserts a statutory business judgment rule which
would offer directors of Commonwealth authorities a safe harbour
from personal liability for breaches of the duty of care and
diligence in relation to honest, informed and rational business
judgments. It is not intended to protect directors in cases of
negligent, ill formed or fraudulent decisions.
Compliance with Statutory
One difference between the Corporations
Law provisions and the proposed amendments to the CAC Act is
the exemption found in new section 27A. It states
that a director or officer does not breach his or her duties under
new Subdivision A if they do an act that another
provision of the CAC Act requires them to do, or if they do an act
in the course of the performance of their duties as a public
servant. This facilitates compliance with statutory duties in
situations of potential conflict.(42)
There is a significant rewriting of all of the
legislative provisions in the Corporations Law dealing with
directors' duties and corporate governance. As with any rewrite,
this may have unintended consequences of creating changes to the
law by virtue of the altered language.
- 'Corporate law reforms to abolish annual returns for one
million companies for the year 2000/2001', 'Medial
release', The Treasurer (the Hon Peter Costello MP) 17
- Company Law Advisory Committee Second Interim Report to the
Standing Committee of Attorneys-General, Disclosure of
Substantial Shareholdings and Takeovers (February 1969),
Parliamentary Paper No. 43, p. 6.
- Corporations Law, s. 731; Sagasco Amadeus Pty Ltd
v. Magellan Petroleum Australia Ltd (1993)177 CLR 508.
- Corporations Law, s. 615.
- Corporations Law, s. 750.
- AF & ME Pty Ltd v. Aveling (1994)14 ACSR 499; 12
- Financial System Inquiry Report, April 1997,
- Corporate Law Economic Reform Program Proposals for Reform:
Paper no.4, Takeovers, p. 45.
- Legal Committee of the Companies and Securities Advisory
Committee, Report by the Legal Committee on Compulsory
Acquisitions (January 1996).
- Corporations Law, s. 1018.
- Corporations Law, s. 66(3).
- Corporations Law, s. 1022(1).
- Fraser v. NRMA Holdings Ltd (1995)55 FCR 452.
- Corporations Law, s. 1005.
- Corporations Law, s. 1006.
- Corporations Law, s. 1024F.
- Financial System Inquiry Report, April 1997,
- Corporations Law, s. 765(1).
- Corporations Law, s. 765(2).
- Explanatory Memorandum, cl. 8.27.
- Corporations Law, s. 1025.
- Corporations Law, s. 292.
- Corporations Law, s. 314.
- Corporations Law, ss. 296 and 297.
- CCH Australia Limited, Australian Accounts Preparation
Manual, Sydney, p. 900.
- Corporations Law, s. 296.
- Corporate Law Economic Reform Program Proposals for Reform:
Paper no.1, Accounting Standards, p. 44.
- AWA Ltd v Daniels (1992) 10 ACLC 933; Daniels v
Anderson (1995) 13 ACLC 763. In Daniels v Anderson
(1995) 13 ACLC 763 at 665, The Court of Appeal stated that 'a
director owes to the company a duty to take reasonable care in the
performance of the office. As the law of negligence has developed
no satisfactory policy ground survives for excluding directors from
the general requirement that they exercise reasonable care in the
performance of their office. A director's fiduciary obligations do
not preclude the common law duty of care.'
- Senate Standing Committee on Legal and Constitutional Affairs,
Company Directors' Duties, November 1989; Companies and
Securities Law Review Committee, Company Directors and
Officers: Indemnification, Relief and Insurance, 1990; House
of Representatives Standing Committee on Legal and Constitutional
Affairs, Corporate Practices and the Rights of
Shareholders, 1991; CASAC, Directors' Duty of Care and
Consequences of Breaches of Directors' Duties, September 1991.
- Howard Smith Ltd v Ampol Petroleum Ltd  AC 821
at 823; Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance)
Oil Co NL (1968) 121 CLR 483 at 493.
- Refer note 28.
- Potential business judgments may concern the company's refusal
to pursue a claim against a director for transactions involving the
business operations of the company.
- CLERP, Proposals for Reform: Paper No.3 "Directors Duties
and Corporate Governance: Facilitating Innovation and Protecting
- House of Representatives Standing Committee on Legal and
Constitutional Affairs Corporate Practices and the Rights of
Shareholders, 1991; CSLRC, Enforcement of the Duties of
Directors and Officers of a Company by means of a Statutory
Derivative Action, Report No.12, 1990; Legal Committee of
CASAC, Statutory Derivative Action, 1993.
- Recent Australian cases have shown that the Courts do not
necessarily consider themselves bound by the restrictions imposed
by the rule in Foss v Harbottle (1843) 2 Hare 461, 67 ER
189, which states that a company is the only proper plaintiff in
respect of wrongs done to the company. There are a number of
exceptions, which have provided shareholders with greater access to
remedies. Unfortunately, to some extent these cases have
contributed to the uncertainty themselves. The increasing reliance
on the interests of justice exception may mean that the
question of standing is at the discretion of the Courts.
- CSLRC, Enforcement of the Duties of Directors and Officers
of a Company by means of a Statutory Derivative Action, Report
No.12, 1990 at p 26.
- Refer Mr G Stapledon in response to Discussion Paper
- Refer note 28 for contrasting judgments by Rogers CJ at first
instance and the majority on appeal and Re Property Force
Consultant Pty Ltd (1995) 13 ACLA 1051; Dempster v Mallina
Holdings Ltd (1994) 13 WAR 12; Permanent Building Society
(in liq) v Wheeler (1994) 11 WAR 187; Vrisakis v
Australian Securities Commission (1993) 9 WAR 395.
- Robert Baxt Australian Business Law Review Vol 26
"CLERP - Two Steps Backward and One Step Forward."
- Canada Business Corporations Act, section 124(3).
- Companies and Securities Law Review Committee, Company
Directors and Officers: Indemnification, Relief and Insurance,
1990 at p.59.
- Conflict may arise, for example, in situations where a director
or officer may act pursuant to ministerial direction.
Lee Jones and Lesley Lang
7 January 1999
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