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Report on the Draft Second Corporate Law Simplification Bill 1996
Table of Contents

EXECUTIVE SUMMARY

Introduction

The Second Corporate Law Simplification Bill 1996 (the Bill), which has not yet been introduced into Parliament, represents the second stage of the Corporations Law Simplification Program. In general terms, the Bill seeks to improve those provisions of the Corporations Law which deal with company formation, company meetings, share capital, financial statements, annual returns, the deregistration of defunct companies and company names.

In June 1995, an Exposure Draft of the Bill was released for public comment. The Bill in its current form represents, in essence, a second Exposure Draft, incorporating the comments and submissions made on the June 1995 Draft.

Preliminary observations

Before discussing in detail the issues raised during the inquiry, the Committee makes the following preliminary observations:

• as noted above, the Bill as considered remains in Exposure Draft form - it has undergone, and is continuing to undergo, an extensive process of refinement through consultation, and the Committee's comments at this stage are made against the background of that process of continuing refinement;
• no-one who gave evidence opposed the Simplification Program, or the process of consultation adopted by the Task Force, or the general approach in the Bill. Almost without exception, there was strong support for the Bill, and the Committee expresses its approval for the principles which have underpinned the Program and for the extensive process of consultation that has been undertaken, and for the general content of the Bill; andin line with much contemporary usage, the Bill makes reference to a "chairperson" - while recognising to the need to remove sexist language from legislation, the Committee notes that the word "chairman" was used consistently in evidence during its hearings, and remains in common usage at company meetings. Therefore, this report continues to refer to a "chairman" and the Committee suggests that the Bill do likewise.

Some drafting issues

The Committee's attention was drawn to numerous matters of detail and issues centred on drafting. In most instances, the Committee has had neither the time nor the expertise to offer a definitive judgement on their merits. Clearly, at this stage in the Bill's development, drafting points are most appropriately addressed in revising and preparing the Bill for introduction into Parliament. However the report includes a number of drafting issues and matters of detail which the Committee suggests might be further considered [see pages 8-10].

Greater recognition of electronic methods of communication

The view was put during the inquiry that the Bill does not fully embrace modern electronic forms of communication. In evidence, the Task Force seemed to recognise this, specifically with reference to the possible electronic delivery to members of notices of meeting, and lodgment of proxies by members. While the Bill should impose no obligation to use electronic forms of communication, it should nevertheless facilitate their use.

The issue of electronic voting was also raised. While there is considerable merit in including in the Bill, as an option, the electronic lodgment of proxies, a number of other issues might arise from the introduction of electronic voting prior to an AGM. For example, while such votes would be relevant to voting on a poll, they would be less relevant to voting on a show of hands. Also, those lodging such votes would not have the benefit of the discussion or questioning at an AGM. Indeed, such voting procedures might ultimately change the character of the AGM, and the Committee was not persuaded that the character of an AGM should change.

Where it was proposed to hold a meeting (whether of directors or members) using electronic technology, the Committee saw merit in suggestions that the intended use of that technology should be known to all participants at the meeting, and that the Bill or the Explanatory Memorandum should clarify the effect on such a meeting of a failure of the technology, or (for a directors' meeting) of a sudden withdrawal of consent to its use.

Finally, the Committee suggested that work be undertaken to avoid the multiple lodgement of documents electronically and in hard copy form where those documents are lodged with the ASX as agent for the ASC [see page 14].

Recommendation No 1:

Director's right to call meetings

The Bill includes a provision which enables a director to call a members' meeting. However, this provision may be displaced by a company's constitution. The Committee accepts that recent events in relation to some companies have demonstrated a need for individual directors of listed companies to be able to act independently in the interests of all shareholders. The right to call a members' meeting gives some substance to this independence and it should not be a right that can be withdrawn through the constitution of a listed company. The Committee considers that it should be a mandatory rule for listed companies.

Recommendation No 2:

Members' right to call meetings

The Bill enables the members of a company to requisition the directors to call a members' meeting, to convene the meeting themselves (at the directors' expense) if the directors refuse that requisition, and, in certain circumstances and at their own expense, to call and convene a meeting themselves.

The Committee considers that, in principle, where directors refuse a requisition for a members' meeting, only those directors who are in default should be liable to reimburse the company for expenses incurred when the members proceed with the meeting. And to avoid the possibility that a members' meeting might be convened to propose invalid or 'pious' or frivolous resolutions, the Bill should make clear that the objects of a meeting requisitioned or convened by members must be valid objects for such a meeting.

Recommendation No 3:

Notice of meetings

The Bill proposes to increase the general notice period from the current 14 days to 21 days. Arguments were put that the period ought to be further extended to 28 days to enable overseas investors to cast a more fully informed vote. A 28 day notice period would seem to involve little additional inconvenience for the management of listed companies, while providing shareholders, particularly foreign investors (who, it was suggested, now own or manage 60% of Australian equities), with a more realistic period of time to arrange for the casting of their votes.

Recommendation No 4:

Questions and comments at an AGM

The Bill provides that the chairman at an AGM must allow a reasonable opportunity for the members as a whole at the meeting to ask questions about or make comments on the management of the company. It also provides that, if the company's auditor or the auditor's representative is at the AGM, the chairman must allow a reasonable opportunity for the members as a whole to ask the auditor or auditor's representative questions relevant to the conduct of the audit and the preparation and content of the auditor's report.

These provisions were the subject of much comment.

The Committee considers that the provisions strike an appropriate balance between the rights of members and the proper conduct of meetings. They provide both an opportunity to elicit information (and to make comments) but no obligation to provide that information. The opportunity rests with the members as a whole; it does not entitle every member to ask questions or to comment. Where information is not provided, members have a further opportunity to pass judgement on the suitability of those who refuse.

With regard to the questioning of auditors, the Committee accepts that auditors are appointed by the members of a company to advise those members. While auditors should not be required to answer specific questions at an AGM, they should be required to attend an AGM and be available to take questions as part of their duties as auditors. Therefore, the Committee adopts the view of the Audit Review Working Party that the Law should be amended to require the auditor (or the auditor's representative) to be available to take questions at the AGM of a listed company at which the auditor's report is tabled.

The Committee notes that section 1289 of the Law provides qualified privilege for statements made by auditors in the course of their duties as auditors. Arguably, the existing provision covers answers to questions by an auditor at an AGM. However, in order to allay doubts that were expressed, the Committee considers that the applicability of qualified privilege to answers at an AGM should be specifically referred to in the Bill or in the Explanatory Memorandum.

Recommendation No 5:

Voting at meetings

The Bill provides that a resolution put to the vote at a members' meeting must be decided on a show of hands unless a poll is demanded. A poll may be demanded by at least 5 members entitled to vote on the resolution, or by members with at least 10% of the votes that may be cast on the resolution on a poll, or by the chairman.

The Committee received evidence suggesting that voting at members' meetings should be by poll only. This would ensure that voting was transparent, and utilised a process similar to that adopted in the US.

The Committee considers that, while there is a superficial attractiveness in conducting a 'one step' voting process, it is not convinced that the arrangements proposed in the Bill can work any conspicuous injustice. An annual general meeting is a significant event, not only for the decisions it may make, but also for the publicity it may attract. A vote on a show of hands enables those who attend the meeting to be influenced by the debate at the meeting. Where a vote on a show of hands does not represent the totality of the votes cast by proxy, it can be overturned quite readily by calling a poll, either from the floor, or by the chairman.The Committee was told that, while the chairman may call a poll, there is no requirement for him or her to do so. It was suggested that, on occasions, a chairman had withdrawn a resolution on the basis of dissent at a meeting in the knowledge that the proxies received before the meeting were in favour of the resolution. In order to clarify these circumstances, the Committee suggests that a chairman should be required to call for a poll if instructed by a required number of the proxies held by him or her, or if the vote on a show of hands does not reflect the votes of the proxies held by him or her.Given the difficulties referred to by both custodians and overseas investors, the Committee considers that a standardised proxy form ought to be developed to enable all shareholders to express the full range of their voting intentions.

Recommendation No 6:

Abolition of par value for shares

The Bill states that the shares of a company have no par value. It is intended that this abolition will apply to shares issued before as well as after the Bill commences. The Bill also abolishes the share premium account and capital redemption reserve.

During the inquiry, concerns were raised about inadequate transitional provisions, and the possible taxation consequences of these proposals.

The Committee notes that proposed changes to the taxation law as a result of the Bill are not within the terms of its inquiry. However, while generally supporting the move to no par value shares, the Committee accepts that the need for an adequate transitional period, and the considerable uncertainty regarding the taxation consequences of the move, must be addressed.The Committee considers that those provisions in the Bill which abolish the par value of shares and the share premium account, and make other consequential amendments, should be further considered in the light of their possible transitional and taxation consequences.

Recommendation No 7:

The Directors' Report

The Bill requires the annual Directors' Report to discuss and analyse the matters members need to be informed about if they are to understand the overall financial position of the company, including its operational results, key strategic initiatives, major commitments entered into and sources of funding for those commitments, any unusual or infrequent events or transactions, likely future developments in the business, and trends or events (both internal and external) that have had a significant effect or are likely to have a significant effect on the business.

The Report must also include a number of specific matters including dividends and distributions paid or declared; the names of all directors; details as to options granted and shares issued as a result of the exercise of options; and details as to indemnities given and certain insurance premiums paid.

While many supported this provision, directors considered it unduly onerous, vague and poorly drafted.The Committee considers that the proposal for a general management discussion should be included in the legislation. It is clearly in line with international trends, and the development of guidelines to give effect to it and to remove many of its alleged uncertainties is already proceeding. It should be given an opportunity to take effect, with an opportunity for review should it not achieve its aims. A similar approach should be taken to the proposal that information may be withheld where it would cause 'unreasonable prejudice'.However, the Committee is persuaded that the following specific matters should also included in the annual directors' report for listed companies:

• disclosure of the Board's policies for determining the remuneration (including incentives) of the Board and senior executives, and the relationship of these policies to the performance of the company/group;
• disclosure of the quantum and components of the remuneration of each director of the company and each of its 5 highest paid executives, including the existence and length of any service contract for the CEO;
• for each director, that director's age and all other listed company directorships;
• whether, during the reporting period, any proceedings had been instituted against the company for any material breach by the company of the Corporations Law or trade practices law and (if so) a summary of the alleged breach and of the company's position in relation to it; and
• whether, during the reporting period, any such proceedings had been concluded or settled and (if so) the terms on which they had been.

The Committee sees much merit in requiring greater disclosure in the terms proposed. Some of these matters (for example, matters involving the age and other directorships of directors) are routinely included in the annual reports of many listed companies already. Others (for example, Board policies and practices concerning remuneration) ought to be. The Committee was told that better disclosure of remuneration matters is in accord with international best practice in corporate governance, and should enable shareholders to better evaluate the 'cost' of their managers. Disclosure of contemplated or finalised legal proceedings should give shareholders a better idea of the company's actual or potential liabilities.

Recommendation No 8:

Additional matters

Suggestions were made to the Committee that various other matters ought to be dealt with in the Bill or in a subsequent Bill. In general terms, these related to:

• the need for mandatory disclosure to Australian investors of information disclosed by Australian listed companies in overseas jurisdictions;
• class meetings; and
• the auditing of financial reports by 'large' proprietary companies.

With regard to disclosure, the Committee considers that there can be no real objection to the proposition that Australian investors in Australian listed companies should receive the same level of information as is provided to foreign investors, and suggests that such a provision be included in the Corporations Law.

Recommendation No 9:

With regard to class meetings, the Committee was told that the original simplification proposal had included a provision giving the members of a class the right to request the directors to call a class meeting, and to call a class meeting themselves. As no explanation had been given for the removal of this provision, the Committee cannot evaluate the need for its inclusion. However, the Committee notes the extensive protections that given to class rights elsewhere in the Bill. It may be that such a provision would accord with other provisions in the Bill relating to members' meetings.

Recommendation No 10:

With regard to the auditing of financial reports by 'large' proprietary companies, the Committee noted concerns raised by the Motor Trades Association of Australia (MTAA) about the ASC's announcement of a Draft Policy Statement for Audit Relief for Large Proprietary Companies and Draft Class Order.While the Draft Class Order has been announced, it seems that it has not yet been promulgated. In these circumstances, it is difficult to be definitive. However, there is much force in the argument put by the MTAA that these additional qualifications indicate a fundamental misunderstanding of how business operates, particularly in relation to cash flows. Their potential effect on other similar businesses is also unclear.The Committee considers that these matters should be examined further, and intends clarifying the matter with the ASC at the next available opportunity. The Committee also intends discussing general concerns on this issue with the ASC and, subject to the outcome of those discussions, intends to review the effect and operation of the small/large test for proprietary companies in early 1997. In the interim, the criteria included in any Draft Class Order, when promulgated, should be reconsidered.

Recommendation No 11:

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