Bills Digest No. 71  1998-99 Corporate Law Economic Reform Program Bill 1998


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
Background
Takeovers
Fundraising
Accounting Standards
Directors' Duties and Corporate Governance
General Discussion
Concluding Comments
Endnotes
Contact Officer and Copyright Details

Passage History

Corporate Law Economic Reform Program Bill 1998

Date Introduced: 3 December 1998

House: House of Representatives

Portfolio: Treasury

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.

Background

General

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
  • fundraising
  • directors' duties and corporate governance
  • takeovers
  • electronic commerce, and
  • financial markets and investment products

On 9 April 1998, the Treasurer released draft legislation in the areas of:

  • takeovers
  • fundraising
  • 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 1999.

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 turn.

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 2400).

Takeovers

Background

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 that:

  1. the shareholders are fully informed, and in particular that they have knowledge of the offeror's identity; and

  2. the shareholders are fully informed of all matters which may be relevant to the merits of the proposal;

  3. the shareholders have sufficient time reasonably to assess the merits of the proposal; and

  4. 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 opportunity principle.

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 company; and
  • a person who holds more than 20% of the voting shares of a company must not acquire more shares,

unless certain provisions are complied with.(4)

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 are:
  • 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 (section 623).

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 notes.

Takeover of unit trusts

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 writer.

In April 1997, the Financial System Inquiry recommended that takeover provisions should apply to public unit trusts.(7)

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 Panel

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 unacceptable.

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 orders.

A few of examples of unacceptable circumstances are:

  • 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 company
  • 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.

Super-voting shares

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 share.

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 opportunities.

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 acquisitions

Compulsory acquisition

Section 701 of the Corporations Law establishes a procedure whereby, after making a takeover bid, the offeror may proceed to acquire compulsorily the outstanding minority shareholdings.

The following requirements must be satisfied in order that the offeror may proceed to compulsory acquisition:

  1. the offeror must have made takeover offers under a full takeover scheme (i.e. not a partial bid) or under a takeover announcement;

  2. the number of shares in the relevant class to which the offer is entitled must have become not less than 90%;

  3. the 90% threshold must have been reached during the takeover period;

  4. 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:
  1. 75% of the offerees have disposed of their shares to the offeror; or

  2. 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 701:

  • 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 associates.

Enforced acquisition

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 90%.

The terms on which the remaining shares are to be purchased are:

  • the terms applicable immediately before the expiration of the offer period;
  • 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)

Main Provisions

Preliminary

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 prohibition

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 606.

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 in.

The exceptions

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 Panel

The role of the Corporations and Securities Panel is to be significantly enhanced. The enhancements are as follows:

  • 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 section 657C).
  • 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 657A(1)).
  • 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 657A(2)).
  • 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 657D(2)).
  • 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 659B).

Compulsory and enforced acquisitions

Following a takeover bid

Proposed new section 661A sets out the circumstances in which a bidder may compulsorily acquire securities:

  • the takeover bid must have been for all the securities in the bid class
  • 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 changes:

  • 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).

Fundraising

Background

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 investment opportunity.

When must a prospectus be issued?

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. (10)

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 prospectus

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:

  1. the assets and liability, financial position, profits and losses, and prospects of the corporation, and

  2. the rights attaching to the securities.(12)

Liability for contents of the prospectus

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 securities'.

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 statements.(13)

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, or
  • 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 was inadvertent.

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.

Main Provisions

The basic premise that an offer of securities for issue requires disclosure of certain information to prospective investors, remains unchanged (proposed new section 706).

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

Prospectus

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 assessment of:

  • 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 710).

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.

Profile statement

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 include:

  • an outline of the nature of the investment
  • the standard charges for purchasing and selling the securities
  • 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 721(2)).

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 (OIS)

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 regime

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 1974.

Advertising

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. (21)

Proposed new section 734permits the advertising of basic information of a proposed offer before lodgement of the disclosure document.

Accounting Standards

Preparation of financial statements

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 standards.(24)

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 entity.(25)

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 Board (AASB)

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 bodies.

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.

Reform

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.

Funding

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, namely:

  • the business sector, as preparers and users of financial reports
  • 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 accounting standards.

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).

Directors' Duties and Corporate Governance

Background

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.

Main Provisions

Schedule 1

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 Corporations Law."

Introduction

To facilitate reform in the corporate governance area it is proposed to introduce:

  1. 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

  2. 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

  3. authority for the delegation of director's powers subject to any constitutional restrictions of the company; new sections 190 and 198D

  4. 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 section 189

  5. a right of access for directors to company books at all reasonable times for the purposes of certain legal proceedings; new section 198F

  6. 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

  7. 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 and 184

  8. 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

General Discussion

1. Statutory Business Judgment Rule

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 interest.(31)

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 inexpedient.

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 provisions.

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 care.

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 diligence required.

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 Action

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 company.

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 confusion.(35)

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 conduct.

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 purposes.

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 238.

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 section.

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 speculation.

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 rule.

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 itself.

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 Powers

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 189.

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 inquiry.

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 liabilities.

5. Access to Company Books

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 them.

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 187.

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 relationship.

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 terms.

7. Reformulation of Duty to Act Honestly

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 be permitted.

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 199B.

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 absolute right.

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 defence costs.(40)

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 directors.

Indemnity will not be permitted for liability for a pecuniary penalty or a compensation order.

New subsection 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 propose.

Schedule 5 - Consequential amendment of the Commonwealth Authorities and Companies Act 1997

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 sector corporations.

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 activities.

Commonwealth authority

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.

Commonwealth company

Section 34 defines a Commonwealth company to be a Corporations Law company in which the Commonwealth has a controlling interest.

2. Conduct of Directors and Officers

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 Corporations Law.

3. Amendments

Division 4 - Conduct of Officers

Item 11 of Schedule 5 of the Bill repeals Division 4 and substitutes new Division 4.

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 Rule

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 Duties

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)

 

Concluding Comments

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.

Endnotes

  1. '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 September 1998.

  2. 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.

  3. Corporations Law, s. 731; Sagasco Amadeus Pty Ltd v. Magellan Petroleum Australia Ltd (1993)177 CLR 508.

  4. Corporations Law, s. 615.

  5. Corporations Law, s. 750.

  6. AF & ME Pty Ltd v. Aveling (1994)14 ACSR 499; 12 ACLC 831.

  7. Financial System Inquiry Report, April 1997, Recommendation 87.

  8. Corporate Law Economic Reform Program Proposals for Reform: Paper no.4, Takeovers, p. 45.

  9. Legal Committee of the Companies and Securities Advisory Committee, Report by the Legal Committee on Compulsory Acquisitions (January 1996).

  10. Corporations Law, s. 1018.

  11. Corporations Law, s. 66(3).

  12. Corporations Law, s. 1022(1).

  13. Fraser v. NRMA Holdings Ltd (1995)55 FCR 452.

  14. Corporations Law, s. 1005.

  15. Corporations Law, s. 1006.

  16. Corporations Law, s. 1024F.

  17. Financial System Inquiry Report, April 1997, Recommendation 9.

  18. Corporations Law, s. 765(1).

  19. Corporations Law, s. 765(2).

  20. Explanatory Memorandum, cl. 8.27.

  21. Corporations Law, s. 1025.

  22. Corporations Law, s. 292.

  23. Corporations Law, s. 314.

  24. Corporations Law, ss. 296 and 297.

  25. CCH Australia Limited, Australian Accounts Preparation Manual, Sydney, p. 900.

  26. Corporations Law, s. 296.

  27. Corporate Law Economic Reform Program Proposals for Reform: Paper no.1, Accounting Standards, p. 44.

  28. 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.'

  29. 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.

  30. Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at 823; Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 at 493.

  31. Refer note 28.

  32. 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.

  33. CLERP, Proposals for Reform: Paper No.3 "Directors Duties and Corporate Governance: Facilitating Innovation and Protecting Investors."

  34. 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.

  35. 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.

  36. 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.

  37. Refer Mr G Stapledon in response to Discussion Paper No.11.

  38. 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.

  39. Robert Baxt Australian Business Law Review Vol 26 "CLERP - Two Steps Backward and One Step Forward."

  40. Canada Business Corporations Act, section 124(3).

  41. Companies and Securities Law Review Committee, Company Directors and Officers: Indemnification, Relief and Insurance, 1990 at p.59.

  42. Conflict may arise, for example, in situations where a director or officer may act pursuant to ministerial direction.

Contact Officer and Copyright Details

Lee Jones and Lesley Lang
7 January 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

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and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1999

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Published by the Department of the Parliamentary Library, 1999.

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