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




2.1 Before discussing in detail the issues raised by the Committee's inquiry into the provisions of the Bill, it is useful to make some preliminary observations.

2.2 First, it should be said again that the Bill considered by the Committee has not yet been introduced into Parliament, and remains an Exposure Draft only. Clearly, it has undergone, and is continuing to undergo, an extensive process of refinement through consultation. The Committee's comments at this stage are made against the background of that process of continuing refinement.

2.3 Secondly, no-one who gave evidence to the Committee opposed the Simplification Program, or the process of consultation that the Task Force had adopted, or, indeed, the general approach of the Bill. Almost without exception, there was strong support for the Bill. [1]

2.4 For example, the Chartered Institute of Company Secretaries in Australia declared itself "strongly supportive of the thrust and progress of the Simplification exercise" and as welcoming the early introduction of the Bill. [2] The Australian Investment Managers' Association (AIMA) stated that, in general, it "strongly supports" all the new initiatives contained in the Bill, except where it proposed specific changes, and "if there were to be any consideration of omitting or watering down any of those initiatives in the final legislation, the AIMA would wish to submit arguments in favour of their retention". [3] The Australian Institute of Company Directors (AICD) stated that it had enjoyed a very good working relationship with the Simplification Task Force and that "the Task Force is to be congratulated for their liaison approach to the preparation of the legislation. [4] And the Australian Shareholders' Association (ASA) summarised its views as follows:

2.5 The Committee endorses these views and expresses its approval for the principles which have underpinned the Simplification Program, for the extensive process of consultation that the Task Force has undertaken, and for the general content of this Second Bill.

2.6 Thirdly, in line with much contemporary usage, the Bill makes reference to a "chairperson". While recognising 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.

2.7 Finally, the Committee received many comments on the provisions of the Bill. These seemed to fall into two broad categories: comments as to drafting issues and matters of detail, and comments involving issues of broader principle. Subject to paragraph 2.8 below, in this Report the Committee proposes to focus on these issues of principle.


Some drafting issues

2.8 Comments as to drafting issues and matters of detail ranged widely across the provisions of the Bill. In most instances, the Committee has had neither the time nor the expertise to offer a definitive judgement on their merits. It has, however, made all such comments available to the Simplification Task Force. 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. Some drafting issues and matters of detail which the Committee suggests might be further considered include:

2.9 The remainder of this Chapter discusses a number of broader issues which arose during Committee consideration of the Bill.


Greater recognition of electronic methods of communication

Notice of members' meetings: proposed section 249J

2.10 The view was put during the inquiry that the Bill does not fully embrace modern electronic forms of communication. In a number of areas, the Bill specifically recognises such technology. For example, proposed section 288 specifically recognises that company financial records may be kept in electronic form, and proposed section 352 provides for the electronic lodgment of documents with the ASC. However, this recognition does not extend to a number of other areas such as the giving of notice of company meetings.

2.11 Proposed section 249J provides that notice of a meeting of company members may be given by post, by fax, or personally. The option of giving notice via an electronic address (for example, by e-mail or via the Internet) is not included. The desirability of including such an alternative was canvassed by a number of those who provided evidence to the Committee. [21] For example, AIMA stated that:

2.12 AIMA went on to observe that:

2.13 In evidence to the Committee, the Task Force seemed to accept the need for greater recognition of this trend. Indeed, there was recognition that a notice of meeting, delivered electronically, might also specify an electronic return address to which proxies could be sent. [24] While the Bill should impose no obligation to use these forms of communication, it should nevertheless facilitate their use.

2.14 Such an approach necessarily involves consideration of appropriate procedures for ensuring the security of the information, and for verifying that it has actually been sent and received. However, it was pointed out that confirming the receipt of an electronically delivered notice, or minimising the risk of its transmission to an out-of-date electronic address, were little more than extensions of problems that were routinely encountered by companies already, and were essentially practical problems that were being resolved. [25]


Electronic voting

2.15 The Australian Shareholders Association (ASA) argued that the Bill should go still further, and provide not only for the appointment of proxies by electronic means, but also for shareholders to lodge their votes electronically. ASA argued that proxy forms had, in effect, become postal voting forms and the legislation should recognise this fact:

2.16 This view was supported by AIMA, among others, who illustrated the effect of the trend internationally:

2.17 While the Committee sees considerable merit in including in the Bill, as an option, the electronic lodgment of proxies, [28] 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 has not been persuaded that the character of an AGM should change.


Holding of meetings: proposed sections 248D and 249S

2.18 Another area in which the Bill specifically recognises the use of electronic technologies is in the holding of meetings. Proposed section 248D states that a directors' meeting may be called or held using any technology consented to by all the directors. Such a consent may be a standing one.

2.19 Proposed section 249S enables a company to hold a members' meeting at 2 or more venues using any technology that gives members a reasonable opportunity to participate.

2.20 While proposed section 248D simply reflects existing practice as expressed in the articles of many companies, it was suggested that, without clarification, it might be used by one director to deny other directors a right to vote:

2.21 It was also suggested that, where a members' meeting is to be held at more than one place under proposed section 249S, the details of the technology should be set out in the notice of meeting so that shareholders are made aware of what is planned. [30]

2.22 Again, there is considerable merit in these observations. In summary, where it is proposed to hold a meeting with the assistance of technology, the Committee considers that:


Technology and the multiple lodgement of documents

2.23 The ASX drew attention to the combined effect of two requirements under the Law: listed companies are required to lodge financial statements with both the ASC and the ASX, and the ASX is separately required to make information lodged with it available to the ASC. The difficulties created by dual lodgement have been recognised and, on 4 March 1996, the ASC and the ASX jointly announced the issue of Class Order 96/222. This Order relieves listed disclosing entities from the obligation to lodge accounts with the ASC where the entity provides signed accounts for an accounting period to the ASX, and no fee is payable in relation to lodgement of those accounts with the ASC.

2.24 However, as there is a Corporations Law requirement for signed accounts, the accounts must be lodged with the ASX in hard copy or by facsimile copy:

2.25 The Committee considers that a solution to this essentially practical difficulty might be addressed either through the greater recognition of electronic forms of communication in the Bill, or through further consultation between the ASC, the ASX and the Department.


Recommendation No 1:

The Committee recommends that:


Director's right to call meetings: proposed section 249C.

2.26 Proposed section 249C introduces a replaceable rule that a director of a company may call a meeting of the company's members. The value of the provision was endorsed by Corporate Governance International (CGI):

2.27 The Australian Shareholders' Association suggested that the provision should be a replaceable rule for proprietary companies but a mandatory rule for public companies, and AIMA suggested that it should be mandatory for listed companies. [33]

2.28 The Committee accepts that recent events in relation to some companies have indicated a need for individual directors of listed public 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:

The Committee recommends that the right of an individual director to call a meeting of members should be a mandatory rule for listed companies.


Members' right to call meetings: proposed sections 249D, 249E and 249F.

2.29 Currently, the Corporations Law enables the members of a company to requisition the directors to convene a general meeting, and, unless the articles provide otherwise, to convene such a meeting themselves. [34] The Bill proposes to increase the opportunity for these powers to be exercised.

2.30 Under proposed section 249D, the directors of a company must call and arrange for holding a general meeting on the request of:

2.31 The request must be in writing, must be signed by the members making the request, and must state the objects of the meeting. The directors must call the meeting within 21 days after the request is given to the company, and the meeting must be held within 2 months of the giving of the request.

2.32 Under proposed section 249E, if the directors fail to call the meeting within the 21 day period, members having more than 50% of the votes of those members who requested the meeting may call and arrange it themselves. The company must pay the reasonable expenses incurred by the members as a consequence of the failure of the directors, and the directors are jointly and severally liable to reimburse the company for those expenses.

2.33 Under proposed section 249F, members with at least 5% of the votes that may be cast at a general meeting may call, and arrange for holding, a general meeting of the company at their own expense. A company will no longer be able to displace this right by adopting a contrary provision in its constitution.

2.34 Concerns were put before the Committee that these provisions might see all directors penalised for the inaction of some, and that members might requisition or convene meetings frivolously or for improper purposes.


Penalising all directors for the actions of some

2.35 As noted above, under proposed section 249E, where directors fail to call a general meeting in response to a requisition, they are personally liable to pay the costs of convening that meeting.

2.36 The AICD observed that this obligation might operate in an unreasonable way unless it was confined to those directors who were in default:

2.37 KPMG also saw a measure of potential unfairness in the provision, particularly in the case of non-executive directors who may themselves have been unaware of the members' request. Given that the company would have had to pay to call the meeting in any event, KPMG queries the need for the company to be reimbursed by directors. [36]

2.38 The Committee considers that, in principle, only those directors in default should be liable to reimburse the company for expenses incurred in calling a meeting. The Committee notes that its recommendation in para 2.28 (giving each director of a listed company the power to call a meeting) may have some effect on this view as regards listed companies.


Meetings requisitioned directly by members

2.39 Proposed section 249F was vehemently opposed by the Chartered Institute of Company Secretaries as threatening to "create havoc" for a large number of companies: [37]

2.40 The Institute saw no evidence to suggest that the current approach was flawed, and saw no reason to include the proposed section.

2.41 The view that members' meetings generally must be called for 'proper' purposes - ie, the objects of the proposed meeting must be appropriate objects for a members' meeting - was also put by the AICD, [39] citing in support court decisions such as NRMA v Parker (1986) 4 ACLC 609; John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 at 134 and Quin & Axtens Ltd v Salmon [1909] AC 442. The AICD felt it important that this significant qualification on members' rights should be clearly set out in the legislation.

2.42 In response, the Task Force stated that:

2.43 On balance, the Committee considers that proposed section 249F should be retained in the Bill for the reasons given by the Task Force. To prevent it being used to propose invalid or 'pious' or frivolous resolutions, the legislation should make it clear that the objects of a meeting requisitioned or convened by members must be valid objects for such a meeting.

Recommendation No 3:

The Committee recommends that:


Notice of meetings: proposed section 249H

2.44 The Corporations Law currently provides for a general period of 14 days' notice for all members' meetings (with 21 days notice of a meeting to consider a special resolution).

2.45 Proposed section 249H provides, as a general rule, and in the absence of contrary provision in a company's constitution, that at least 21 days notice should now be given for all members' meetings. This extended period was included following suggestions by shareholder and investor bodies that a 14 day notice period was insufficient, particularly where a company had institutional or overseas shareholders. [41]

2.46 Some felt that this extended period was inappropriate, and would create unnecessary delay and inconvenience, and add to company costs. It was also likely to cause a measure of confusion for shareholders used to receiving only 14 days' notice. [42]

2.47 However, institutional investors considered that the proposed 21 day period was itself still insufficient to enable a fully informed vote to be cast. AIMA argued for a minimum notice period of 28 days for meetings of listed companies for the following reasons:

2.48 Foreign institutional investors pointed out that these problems were amplified many times over where they sought to exercise their vote, [44] and a specific example of the effect of insufficient notice on the voting of proxies by institutional investors was provided by CGI. [45]

2.49 Both AIMA and CGI observed that listed companies with a superior record on corporate governance had already demonstrated the benefits and the feasibility of extended notice periods. Examples cited included CRA, which for both its 1995 dual listing proposal and its recent AGM had provided shareholders with substantially more than the statutory minimum notice period, and an unnamed, UK-controlled, major listed company, which in 1995 gave its shareholders 6 weeks notice of its AGM. Significantly, in the latter example, all registered custodians appeared to have voted all their shares. [46]

2.50 Adequate notice involves balancing the interests of company management in ensuring that procedures are efficient with the interests of company shareholders in ensuring that procedures are fully effective. 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), [47] with a more realistic period of time to arrange for the casting of their votes.

Recommendation No 4:

The Committee recommends that, as a general rule, for listed companies, the minimum notice period for a members' meeting should be 28 days.


Questions and comments at an AGM: proposed sections 250S and 250T

2.51 Proposed section 250S states that the person chairing 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.

2.52 The Explanatory Memorandum notes that the asking of questions by members at an AGM is a matter of common practice, which the Bill recognises. The provision is said to be based on similar provisions in the companies legislation in Ontario and New Zealand.

2.53 Proposed section 250T states that, if the company's auditor or the auditor's representative is at the AGM, the person chairing the meeting must allow a reasonable opportunity for the members as a whole to ask the auditor (or the representative) questions relevant to the conduct of the audit and the preparation and content of the auditor's report.

2.54 Both sections only require the person chairing the meeting to provide a reasonable opportunity for questions to be asked. There is no corresponding legal obligation on the directors or the auditor to answer questions.

2.55 The Explanatory Memorandum goes on to note that what is a 'reasonable opportunity' will depend on the circumstances of the meeting:

2.57 The evidence put before the Committee on these two proposals is outlined below.


Questioning of directors

2.57 The Victorian Employers' Chamber of Commerce and Industry (VECCI) considered that, while a statutory right to question directors might seem superficially appealing to advocates of shareholders' rights, a number of difficulties followed. These included the threshold issue of what questions would be regarded as appropriate. There was also the issue of whether to answer a question - a matter of judgement in each circumstance, which would necessarily involve companies in obtaining yet more costly professional advice. Finally, the provision was seen as exposing directors to further legal liability and potential litigation.

2.58 In general terms, VECCI considered that "this shareholder right is inappropriate and has the potential to increase the already onerous liability imposed on directors". [49]

2.59 The Chartered Institute of Company Secretaries suggested that the provision be deleted as unclear, and as likely to lead to confusion on the question of 'reasonableness', and on what might be properly be asked of management. [50]

2.60 The AICD noted with approval the comment in the Explanatory Memorandum that imposing an obligation to answer questions was both "inappropriate and impractical", [51] but proposed that, given its importance, this qualification should be incorporated in the Bill itself. [52]

2.61 Both AICD and ABA proposed that the chairman's right to move from members' questions to the next agenda item should be moved from the Explanatory Memorandum to the Bill itself. This was seen as particularly useful in answering assertions of right by individual members at contested meetings. [53]


Questioning of auditors

2.62 Some auditors contested the desirability of proposed section 250T. For example, KPMG strongly disagreed with its inclusion, and suggested that it be deleted on the basis that "while the sentiment is admirable, it will be unworkable in practice":

2.63 To illustrate the potential difficulties, KPMG canvassed some of the types of question that might be directed to auditors:

2.64 KPMG concluded that the interpretation of the provision would not be a clear and easy task for chairmen, auditors or members. Even if a question were outside the members' right, a refusal to answer would reflect badly on the auditor, and might "unjustly adversely influence shareholders' views as to acceptability of that auditor". [56] And where a member relied on an answer, the potential liability of the auditor would be extended unacceptably. If the provision were retained, KPMG proposed that the only way to make it effective and workable was for members to have the right to question the auditor on notice. [57]

2.65 Both KPMG and Deloitte Touche Tohmatsu suggested that the auditor's right of qualified privilege under existing section 1289 should be extended to specifically cover the auditor in relation to answering members' questions at an AGM. [58]

2.66 However, Ernst & Young did not think this provision was an issue:

2.67 The ASX doubted the likely effectiveness of the provision, given that the Bill would not require auditors to actually attend an AGM. The ASX referred to the risk of a practice developing of auditors not attending meetings in order to avoid questioning. [60]

2.68 The Law currently provides that an auditor is entitled both to attend a company general meeting, and to be heard on any part of the business of the meeting that concerns the auditor in the capacity of auditor. [61] The established practice seems to be that auditors attend AGMs, and are expected by directors to attend. [62] The Committee also notes that, in April 1996, a Working Party appointed by the Commonwealth Government to conduct a review of requirements for the registration and regulation of auditors issued a Draft Report which recommended that the Corporations Law should be amended to require an auditor or auditor's representative to attend the AGM at which the auditor's report is tabled. [63]


The views of shareholders

2.69 Not surprisingly, shareholders and their representatives spoke strongly in favour of the right to question, particularly to address questions to auditors:

2.70 Indeed, CGI proposed that the right to question auditors should be extended - shareholders representing 5% of the voting rights, or 100 shareholders, should be entitled at any time (not only at the AGM, where the scope for a useful outcome was seen as limited) to address written questions within the scope of the auditor's role directly to the auditor, who should be obliged to answer them within a reasonable time. This proposal was seen as creating "a stronger sense of the auditor's responsibility to the shareholders and of shareholders' confidence in the auditor". [65]

2.71 The Committee considers that, at this time, proposed sections 250S and 250T strike an appropriate balance. They provide both an opportunity to elicit information (and to make comments) and a discretion not to provide that information in certain circumstances. Where information is not provided, members have a further opportunity to pass judgement on the suitability of those who do refuse.

2.72 With regard to the questioning of auditors, the Committee accepts the view 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 Working Party, as noted in para 2.68 above, that the Law should require the auditor of a listed company (or a representative) to be available to take questions at the AGM at which the auditor's report is tabled.

2.74 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 would cover answers to questions by an auditor at an AGM. However, in order to allay those doubts that have been 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:

The Committee recommends that:


Voting at meetings

2.74 Proposed section 250J states that a resolution put to the vote at a members' meeting must be decided on a show of hands unless a poll is demanded. On a show of hands, a declaration by the person chairing the meeting is conclusive evidence of the result.

2.75 Proposed section 250K states that a poll may be demanded on any resolution. However, a company's constitution may provide that a poll cannot be demanded on a resolution for the election of a person to chair the meeting, or the adjournment of the meeting.

2.76 Proposed section 250L states that, at a members' meeting, a poll may be demanded by at least 5 members entitled to vote on the resolution, or members with at least 10% of the votes that may be cast on the resolution on a poll, or the person chairing the meeting.

2.77 The company's constitution may provide that fewer members or members with a lesser percentage of votes may demand a poll. A poll may be demanded before a vote is taken, or before the voting results on a show of hands are declared, or immediately after the voting results on a show of hands are declared.

2.78 AIMA (with the support of a number of major US institutional investors) strongly submitted that voting at shareholder meetings of listed companies should be by poll only, and voting on a show of hands should be done away with. Its reasoning was that:

2.79 Such an approach was said to have the following benefits:

2.80 Additionally, AIMA proposed that listed companies be required to prepare prior to a meeting, and to disclose on request after the meeting, the computer reports which recorded the aggregate proxy votes validly received for the meeting in the various voting categories:

2.81 AIMA noted that international best practice in corporate governance requires that this information be disclosed - for example, such disclosure is mandatory in the US. In addition, while a number of listed companies did voluntarily disclose this information on request, many others withheld it, often because disclosure was not required under legislation.

2.82 AIMA also noted that there was no consistency in the format of a proxy appointment form, and that forms used by some companies effectively prevented representative shareholders or custodians from splitting their votes. [68]

2.83 More general criticisms were voiced by National Australia Custodian Services (NCS):

2.84 If the proposals in the Bill were to be retained, NCS suggested that:

2.85 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 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 the 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.

2.86 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. [71] 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.

2.87 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:

The Committee recommends that further consideration be given to the issue of voting at meetings, with particular reference to:


Abolition of par value for shares: proposed section 254C

2.88 Proposed section 254C states that shares of a company have no par value. [72] Proposed section 1425, included as a transitional provision in Schedule 1 to the Bill, states that the abolition of par value applies to shares issued before, as well as after, the Bill commences.

2.89 Proposed section 1426 deals with the effect of these provisions on existing shares. Under this provision:

2.90 Proposed section 1427 provides that, after the Bill commences, any amount standing to the credit of the company's share premium account [73] and capital redemption reserve becomes part of the company's share capital.

2.91 However, under proposed section 1429, a shareholder's liability to pay calls on partly-paid shares issued before the Bill commences is not affected by the abolition of par value.

2.92 The Explanatory Memorandum to the Bill states that:

2.93 The Explanatory Memorandum goes on to note that, in 1990, the Companies and Securities Law Review Committee had recommended that companies be given an option of issuing no par value shares. However, the Bill had taken a slightly different approach because "a system that permitted both par value and no par value shares would unnecessarily complicate the Law and its administration". [75]

2.94 Evidence to the Committee raised various concerns about these provisions. Some felt that the abolition of par value represented a needless restriction on choice:

2.95 Others drew attention to the inadequacy of the transitional provisions. For example, the ASX noted that the abolition of par value would require it to draft, publicise and circulate amended listing rules, which would have to take effect from the date par value was abolished:

2.96 Potential tax problems raised before the Committee included:

2.97 The tax impact of some of the proposed changes was canvassed in a Discussion Paper issued jointly by Treasury and the Australian Taxation Office in June 1996. Among other things, the Paper notes that:

2.98 The Discussion Paper makes no specific reference to the taxation consequences for converting preference shares. With regard to bonus issues, it goes on to note that subsection 6(5) of the current tax law provides that such an issue is tax-free if paid out of a share premium account; it is taxed as the payment of a dividend if paid out of profits. Under the proposed treatment:

2.99 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.

2.100 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 Committee recommends that the adequacy of the transitional period for, and the possible taxation consequences of, those provisions in the Bill which abolish the par value of shares and the share premium account, and make other consequential amendments, should be carefully considered by the government. The Committee also would welcome an opportunity to further examine this issue when the Bill is ultimately introduced into Parliament.


The Directors' Report - proposed sections 299 and 300

2.101 Proposed section 299 of the Bill deals with the general content of the annual directors' report. The section states that the report must "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.

2.102 However, proposed section 299(3) states that the report may omit material that would otherwise be included as relevant to likely future developments, or trends and events, "if it is likely to result in unreasonable prejudice to the company". If material is omitted, the report must say so.

2.103 The Explanatory Memorandum notes that this report is intended to benefit members by requiring that they be given information about the business which they can understand, even if they are unaccustomed to reading financial statements. It is said that the new provisions "will encourage a more descriptive, narrative approach to reporting to members about the business" and their framework has been formulated against the background of both the current Corporations Law and comparable overseas requirements. [84]

2.104 Proposed section 300 goes on to list a number of specific matters which must also be included in the directors' report, 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.


General management discussion

2.105 Shareholders and their representatives strongly endorsed this provision. [85] It was also vigorously supported by the Group of 100 [86] and by AARF, which observed that it was a required item of disclosure in the US and Canada:

2.106 However, the AICD declared the provision "unduly onerous, vague and not well constructed. The phrase `the matters members need to be informed about', was seen as highly subjective and unnecessary; in particular, it was inappropriate to put the onus on directors to identify the reporting needs of shareholders". Additionally, the words 'discuss and analyse' were seen as "significantly more onerous than the existing requirements," and the mixing of historical information with views about the future was seen as inappropriate. [88]

2.107 The AICD concluded that each word of the provision "is certain to be the subject of debate and legal argument, at considerable cost and inconvenience to directors". Its preference was for a simple and general requirement to discuss, from the perspective of the members, the significant features of the results, financial position and cash flows for the reporting period, and major factors likely to influence the results, financial position and cash flows for subsequent periods. [89]

2.108 Others commented:

2.109 The 'unreasonable prejudice' exception in proposed section 299(3) was also discussed. Ernst & Young considered that the term appeared "too open to subjective interpretation":

2.110 Similarly, CGI was of the view that the term was "too loose", encouraging and enabling management to withhold disclosure contrary to the apparent intention of the section. It proposed as a more appropriate test for non-disclosure "the interests of the company in omitting the material are properly explained and justified in the discussion and analysis and override the interests of shareholders or scheme participants to be fully informed. [93]

2.111 In evidence to the Committee, the Task Force drew attention to the seemingly "furious agreement" of all parties that there should be better quality disclosure, but restated the principles which underpinned the proposed section:

2.112 The Committee considers that proposed section 299 should stand unamended. 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 'unreasonable prejudice' exception in proposed section 299(3).


Additional specific matters

2.113 Submissions to the Committee sought the inclusion of a number of additional specific matters in the annual directors' report for listed companies. These included:

2.114 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.

2.115 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 companies actual or potential liabilities. The Committee considers that directors' reports should specifically include the information set out in paragraph 2.113.

Recommendation No 8:

With regard to the annual directors' report, the Committee recommends that:



[1] See, for example, Submissions, p 139 (Deloitte Touche Tohmatsu); p 196 (AARF); p 308 (Securities Institute of Australia). One witness cautioned that the radical changes contained in the Bill required "very careful examination and evaluation": Submissions, p161 (Mr T Bostock).

[2] Submissions, p 158.

[3] Submissions, p 179.

[4] Evidence, p CS 71 (Mr Lumsden).

[5] Evidence, p CS 28 (Mr Rofe).

[6] Evidence, p CS 100 (Mr Bateman) and p CS 126 (Mr Yen).

[7] Submissions, p 2 (Goodman Fielder Ltd).

[8] Submissions, p 13 (ASX).

[9] Submissions, p 7 (ASX); Evidence pp CS 34-35 (Mr Rofe).

[10] Submissions, p 84 (AICD).

[11] Submissions, p 67 (ABA).

[12] Submissions, p 14 (ASX). See also Submissions, p 118 (AICD).

[13] Submissions, p 76 (AICD).

[14] Submissions, p 28 (Ernst & Young); p 76 (AICD); p 147 (Deloitte Touche Tohmatsu); p 213 (AARF); pp 258-9 (Coopers & Lybrand).

[15] Submissions, p 42 (Ernst & Young). See existing Corporations Regulations 3.8.01(1)(q).

[16] Redeemable preference shares are defined in Chapter 1 of this report, at note 6.

[17] Submissions, p 207 (AARF).

[18] Issues shares to its members in exchange for their memberships.

[19] Submission No 4 (Confidential).

[20] Submissions, p 39 (Ernst & Young).

[21] Evidence, p CS 32 (Mr Rofe); p CS 89 (Mr Easterbrook).

[22] Submissions, p 188.

[23] Submissions, p 188.

[24] Evidence, p CS 131 (Mr Patch).

[25] Evidence p CS 35 (Mr Rofe) and p CS 89 (Mr Easterbrook).

[26] Evidence p CS 33 (Mr Rofe).

[27] Evidence, pp CS 131-32 (Mr Matheson).

[28] See para 2.13.

[29] Evidence, p CS 115 (Mr Bateman).

[30] Evidence, p CS 68 (Mr Forster).

[31] Submissions, pp 9-10.

[32] Evidence, p CS 89 (Mr Easterbrook).

[33] Submissions, p 318 (ASA); p 179 (AIMA).

[34] Corporations Law, ss 246 and 247.

[35] Submissions, pp 82-3.

[36] Submissions, p 130.

[37] Evidence, p CS 106 (Mr Bateman).

[38] Evidence pp CS 101-02 (Mr Bateman).

[39] Submissions, p 82.

[40] Evidence, pp CS 126-27 (Mr Yen and Mr Patch)

[41] Explanatory Memorandum, para 10.25.

[42] Submissions, p 308 (Securities Institute of Australia).

[43] Submissions, pp 180-81.

[44] Submissions, p 332 (International Shareholder Services Inc); p 336 (Templeton Global Investors Inc).

[45] Evidence, p CS 87 (Mr Easterbrook).

[46] Evidence, p CS 87 (Mr Easterbrook); Submissions, p 182 (AIMA)

[47] Submissions, p 181 (AIMA).

[48] Explanatory Memorandum, para 10.76.

[49] Submissions, p 264.

[50] Submissions, p 158.

[51] Explanatory Memorandum, para 10.75.

[52] Submissions, p 86.

[53] Evidence, p CS 69 (Mr Forster); Submissions, p 63 (ABA).

[54] Submissions, p 121.

[55] Submissions, pp 122-24.

[56] Submissions, p 124.

[57] Submissions, p 125.

[58] Submissions, p 125 (KPMG); p 140 (Deloitte Touche Tohmatsu).

[59] Evidence, p CS 80 (Mr Hardidge).

[60] Submissions, p 6.

[61] Corporations Law, section 332(8).

[62] Evidence, p CS 78 (Mr Cadwallader).

[63] Audit Review Working Party, Draft Report: Review of the Requirements for the Registration and Regulation of Auditors (April 96) Recommendation 8.17.

[64] Evidence, p CS 79 (Mr Easterbrook).

[65] Submissions, p 279.

[66] Submissions, p 183.

[67] Submissions, p 184.

[68] Evidence, p CS 134 (Mr Matheson).

[69] Submissions, p 152.

[70] This proposal was supported by institutional investors and custodian shareholders: see Evidence, p CS 133 (Mr Matheson) and Submissions, pp 341-3 (Australian Custodial Services Association).

[71] Evidence, p CS 55 (Mr Matheson).

[72] The concept of par value is discussed in Chapter 1 of this Report, at note 5.

[73] Where a share is issued at a premium, the company receives an amount greater than the par value of the share (eg $1.50 for a share with a par value of $1). The existing Law requires the premium ($0.50 in the example) to be paid to a share premium account where it is regarded as part of the paid up capital of the company which may be applied for various purposes. These include issuing fully paid bonus shares, paying up unpaid amounts on previously issued shares, paying dividends satisfied by the issue of shares, or providing consideration for a share buy back by the company. See generally Corporations Law s 191.

[74] Explanatory Memorandum, para 11.24.

[75] Explanatory Memorandum, para 11.26.

[76] Submissions, p 113 (AICD). See also Submissions, p 168 (Mr Bostock).

[77] Submissions, p 8. See also Submissions, p 168 (Mr Bostock), and p 309 (Securities Institute of Australia): possible need for transitional arrangements for redeemable preference shares.

[78] Submissions, p 137 (Trust Company of Australia Ltd).

[79] Submissions, p 137 (Trust Company of Australia Ltd). See also Submissions, p 44 (Ernst & Young),

[80] Submissions, p 253 (Business Law Section, Law Council of Australia)

[81] Submissions, p 44 (Ernst & Young).

[82] Department of the Treasury and the Australian Taxation Office, Discussion Paper, Corporations Law Share Capital Rules: The need to update Taxation Law, June 1996.

[83] ibid, paras 35-37.

[84] Explanatory Memorandum, paras 13.36 and 13.38.

[85] Evidence, p CS 29 (Mr Rofe); Submissions, p 275 (CGI).

[86] Submissions, p 314.

[87] Evidence, p CS 3 (Mr Boymal).

[88] Evidence, p CS 64 (Mr Cadwallader); Submissions, p 72.

[89] Submissions, pp 74-5.

[90] Evidence, pp CS 118-19 (Mr Graham).

[91] Submissions, p 126 (KPMG).

[92] Submissions, p 31.

[93] Submissions, p 275.

[94] Evidence, p CS 127 (Mr Yen).

[95] Submissions, p 189 (AIMA).

[96] Submissions, pp 275-6 (CGI).