Navigation: Previous Page | Contents | Next Page
Chapter 5 - Reporting of Proceedings
Companies should be obliged to report any proceedings 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.
5.1
Four matters were referred to the PJSC that were
the subject of complaint and/or concern expressed to the Government by the
business community. The first of these is the proposal that companies should be
obliged to report any proceedings 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.
5.2
The submissions which addressed this matter
generally opposed the proposal. The evidence presented to the PJSC is set out
below.
Arguments in favour of the proposal
Transparency
5.3
It was submitted that the guiding principle in
reviewing the requirements of the Corporations Law must be that “maximum
transparency must exist in the behaviour and operation of the company.” In line
with this argument, it was recommended that any amendment to the Law should be
drafted so that the requirement for disclosure is equally important at each
stage of the proceedings when the case is initiated, during its progress and
after its finalisation.[1]
5.4
The Australian Law Reform Commission was of the
view that disclosure of this kind is critical for investor confidence:
Investors in, traders with and consumers of the goods/services
of a company should be apprised of all proceedings against the company
for significant alleged breaches of law, not simply those limited to the
Corporations Law and the Trade Practices Act. All such matters relate to good corporate
citizenship. They are, therefore, of real significance to persons investing in
and dealing with the company. In particular, shareholders should be fully aware
of these matters, so as to be able to hold management fully to account for them
and be able to take them into account in their investment decisions.[2]
Corporate governance
5.5
Corporate Governance International Pty Ltd
submitted that Corporations Law and trade practice law proceedings are areas of
significant financial risk for listed companies’. Breaches of the legislation
can reflect on the quality of governance in the company and on public
confidence on the board or directors.[3]
5.6
Boral Ltd had no objection to extending the
corporate governance matters required to be in a listed company’s Annual Report
to include a report on material breaches of the Corporations Law and Trade
Practices Act.[4]
Boral stated that “Arguably, prudent reporting already requires these matters
to be covered in the corporate governance statement.”[5]
Focus on compliance
5.7
The Australian Competition & Consumer
Commission (ACCC) supported the proposal on the basis that it will increase the
pressure on companies to comply with the Corporations Law and the Trade
Practices Act. According to the ACCC, the disclosure requirement will focus the
minds of company executives on the need for compliance at the outset. A further
benefit is that it will provide additional information for
shareholders/investors to make informed decisions. The ACCC noted that the
requirement is to report only where proceedings have been instituted and where
these relate to a material breach of the Law.[6]
Protection of shareholders’
interests
5.8
Mr JA Sutton provided the PJSC with a case study
to demonstrate the need for this requirement in the Law: A successful public company
with a market capitalisation of $200 million became insolvent. The
administrators of the failed company uncovered evidence of false reporting and
insolvent trading and subsequently took legal action involving the directors,
officers and auditors. After a series of actions, litigation ended with a
confidential settlement. Despite the prima facie evidence of fraud and false
reporting, no further action was taken. Shareholders had little knowledge of
the alleged misconduct and the possible denial of rights. The lack of
information about the proceedings prevented members from questioning the board
in a general meeting and from taking any appropriate action.
5.9
Mr Sutton submitted that for shareholders to be
properly protected by a disclosure requirement of this kind, the reporting must
be included in reports to shareholders. Further, that reporting must still
apply where the processes of External Administration are in place and it should
apply to proceedings against directors, officers and auditors of the company as
well as those against the company.[7]
Best practice
5.10
The Accounting Bodies also supported the
requirement in the interests of harmonising disclosures across jurisdictions.
The PJSC was told that in the US, the Securities and Exchange Commission requires
registrants to report the details of material legal proceedings to which the
company, its subsidiaries, property or directors are a party.[8] The Accounting Bodies stated
that it would be appropriate as a matter of “best practice” if Australian
companies were to make similar disclosures.
5.11
Other matters raised by submissions as being
appropriate for disclosure under this requirement are:
- The material details of both actual and threatened cases against
listed companies;
- A statement as to whether the particular action is an isolated or
test case;
- Details of legal expenses, if material;[9]
Arguments against the proposal
Special status not justified
5.12
It was argued by Mr Reg Barrett that this
requirement accorded a special status to the Corporations Law and the Trade
Practices Act:
The first question here is why two pieces of legislation
mentioned merit this special focus to the exclusion of all others. Why are
company law, competition law and consumer protection matters particularly
deserving of such compulsory treatment? Why not include occupational health and
safety laws, superannuation laws, taxation laws and workplace relations laws?
If the aim is to bring to public knowledge instances where a company is alleged
to have fallen short of some statutory standard, it should make no difference
which statute is involved.[10]
5.13
A similar view was put by Ms Jan Wade MP, the
Victorian Minister for Fair Trading, who stated that there was no policy
rationale for choosing trade practice compliance over other kinds of
compliance.[11]
The Chartered Institute of Company Secretaries stated that there was no
justification for highlighting these two specific areas of legislation.[12]
Appropriateness of including the
requirement in the Corporations Law
5.14
It was also argued that the Corporations Law is
not the appropriate medium for introducing this requirement if the real aim of
disclosure is to bring out information about good corporate citizenship.[13] Mr Barrett stated that
‘reporting’ in the context of the Corporations Law is directed primarily at
matters having a financial impact and, under the present law, material breaches
of legislation already play a part in the preparation of the financial accounts
and their examination by auditors. Where there is the likelihood of an adverse
financial impact arising from litigation, notes to the accounts will draw
attention to this. Mr Barrett stated that “material breaches of legislation
(with materiality judged in the financial sense) already play a part in the
formulation of financial material placed by companies before their members.”[14] As such, a requirement for
companies to disclose proceedings instituted against them does not serve a
financial information purpose.[15]
Provision for contingent
liabilities
5.15
The Accounting Association of Australia and New
Zealand (AAANZ) advised that current accounting standards already provide for
the disclosure of provisions and liabilities on contingent items in annual
reports.[16]
Associate Professor Phil Hancock, Member, Legislation Committee of the AAANZ,
further noted that the accounting bodies are moving to adopt a new
international standard on provisions and contingent items that will broaden the
coverage of contingent events. He indicated that the IASC standard would soon
be adopted in Australia.[17]
The institution of proceedings is
not proof that a breach has occurred
5.16
The PJSC was reminded that there is “a world of
difference” between the commencement of proceedings and the proving of an
allegation of a breach of law or that an offence has been committed. Mr Barrett
illustrated this point with reference to proceedings under the Trade Practices
Act:
It is commonplace for alleged breach of section 52 of the Trade
Practices Act to be worked into what are in essence ordinary breach of contract
claims. Thus, a computer supplier whose customer finds fault with the product
supplied will sue for damages not only for breach of contract but also on the
basis that some misleading or deceptive statement was made or conduct occurred
in the course of the sale transaction. This is part and parcel of commercial
life. But the allegation is no more than just that.[18]
5.17
Other submissions objected to the proposed
disclosure requirement on the ground that the institution of proceedings in
itself is not proof that a breach has been committed and reporting on such
matters may only serve to give credibility to what might otherwise be vexatious
or frivolous claims. Where allegations
are made public, the perception can be that the allegations are true, which
would be misleading.[19]
It was also suggested that proceedings against a company might be commenced for
purely tactical or collateral purposes.[20]
Disclosure might prejudice a
company’s defence and offers no protection against self incrimination
5.18
A principal objection to the disclosure of
proceedings instituted against companies and a summary of any alleged breach of
particular legislation is that these types of disclosures might operate to
prejudice a company's defence and therefore harm shareholders’ interests.[21] Caltex Australia Ltd opposed
the requirement on the grounds that it would be clearly prejudicial to the
company's position and would serve no public purpose. Such an obligation could
give rise to a waiver of privilege in relation to legal advice and provided no
protection against self-incrimination. Caltex Australia submitted that denial
of the privilege against self-incrimination to a corporation would undermine
its position in the adversary system of justice.[22]
5.19
Viewed in the context of the continuous
disclosure regime, Freehill Hollingdale and Page advised the PJSC that
additional reporting obligations are undesirable and would place companies in
an invidious position:
They could force companies into making written admissions, which
could then be used against the company in litigation. This would usually not be
in the interests of shareholders.
Again, there is a substantial risk of disproportion between
reporting and impact upon the company.[23]
Cost of compliance – a case study:
Coles Myer Ltd
5.20
At its hearing, the PJSC was told that Coles
Myer Ltd received a large but decreasing number of claims and allegations
against it because of the nature of its business activities.[24] Coles Myer questioned the cost
benefit that would flow from requiring a company to list in its annual report
the allegations of material breaches of the relevant legislation. The PJSC
requested Coles Myer Ltd to provided an estimate of the potential cost of
complying with the proposed requirement.
5.21
In response Coles Myer indicated that 138
documents were formally served on the company in the last 12 months that
related to legal proceedings. Coles Myer advised that it received 11 in
September 1998, 15 in October 1998, 13 in November 1998, 7 in December 1998, 17
in January 1999, 13 in February 1999, 13 in March 1999, 11 in April 1999, 11 in
May 1999, 15 in June 1999, 7 in July 1999 and 5 in August 1999.
5.22
Based on the total number of documents served on
the company, Coles Myer estimated the following additional annual costs that it
would incur in reporting alleged material breaches:
To collect the information and have
external legal advice as to which allegations are related to alleged material
breaches ($150,000).
The cost of internal lawyers to
review each allegation ($69,000, $500 per claim on a conservative basis).
To have external lawyers handling
each matter settle the wording so that the company does not prejudice its
position in regard to each allegation ($100,000).
To ensure that the reporting of the
allegations are not defamatory to the parties involved with each claim
($50,000).
Dealing with the disclosure in
litigation and in the courtroom ($100,000).
Dealing with the non-disclosure in
litigation and in the courtroom ($100,000).
Costs of directors being called to
be examined in litigation on the information that they have, or have not, included
in their directors report ($100,000).
Briefing directors as witnesses and
attendance on counsel ($100,000).
To settle the note relating to
reporting compliance ($5,000).
Costs estimated to be in excess of $750,000.
5.23
Coles Myer was unable to put a total cost on
complying with the requirement if this resulted in subsequent defamation
action.[25]
Adequacy of existing disclosure
requirements
5.24
Several organisations and individuals were of
the view that the existing requirements for disclosure in annual reports or
under the provisions of the ASX’s continuous disclosure are adequate.[26] The Association of Mining and
Exploration Companies Inc (AMEC) argued that:
As highlighted previously, Listing Rule 3.1 requires companies
to disclose continuously material events. AMEC contends that Listing Rule 3.1
is a sufficient and effective method of company disclosure which negates the
need for the provision detailed above.[27]
5.25
Similarly the Investment & Financial
Services Association Ltd did not believe that “it is necessary to enact these
types of provisions as the existence of proceedings will be publicised and
directors are already obliged to disclose contingent liabilities under the
continuous disclosure regime.”[28]
5.26
Likewise, the PJSC was told that the suggested
additional requirement would “add no further value to the manner in which these
issues are presently dealt in terms of the current Corporations Law
requirements.”[29]
5.27
Caltex Australia contended that the existing
reporting requirements are sufficient:
... auditors have for some time been obliged to report suspected
contraventions of the Corporations Law by companies they audit to the
Australian Securities and Investment Commission (ASIC). That obligation is now
contained in section 311 of the Corporations Law. This process ensures that
contraventions are brought to the attention of the ASIC at the earliest
possible opportunity, and addressed by the regulator.[30]
Control of legal proceedings
5.28
A possible consequence of placing information
about legal proceedings in the public arena is that the proper control and
process of those proceedings might be jeopardised. A basic principle of the
judicial system is that the court controls proceedings rather than the media,
the ASIC or any other authority. It was argued that the illogicality of the
proposal is demonstrated by extending the disclosure requirement to all
individuals, corporate bodies and individuals against whom any proceedings are
instituted for any breach of any law. It would be unacceptable to require those
defendants to provide a summary of the alleged breach and the defendant’s
position in relation to it. Mr John Wilkin, General Counsel, Corrs Chambers
Westgarth, told the PJSC that:
It is submitted that it is fundamental to the administration of
justice and the fairness of process that companies against whom breaches are
alleged should not have to confess or plead in public, or state their position,
or take or omit any step other than those required by the law for those
proceedings. It is for the court to control those proceedings, not the media,
the ASC or anyone else.[31]
5.29
Mr Wilkin emphasised that it was a matter for
the courts to assess what the company’s position is in relation to the alleged
offences, when it must plead and whether the case will be brought to trial.[32]
Negative impacts beyond share price
5.30
Arnold Bloch Leibler opposed the disclosure
requirement on the grounds that the disclosure of proceedings might have a
continuing damaging effect on the company beyond its share price. Under the
continuous disclosure regime companies are required to disclose in the
directors’ report any proceedings against the company that might affect the
company in a ‘material’ way. According to Mr John Fast, a partner with the law
firm Arnold Bloch Leibler, the additional reporting, which is based on whether
proceedings have been instituted, might have a continuing damaging effect on
investor confidence, on the company’s share price, its credit rating, and
banking arrangements, even after the matter has been resolved.[33] Mr Fast questioned whether the
disclosure would enhance shareholder knowledge:
The problem is that being required to report it does not mean
that it adds anything factually to the state of knowledge of shareholders. I do
not think one ought to encourage a regime where shareholders may make decisions
based purely on the question of whether proceedings have been instituted as
opposed to whether they have been resolved and whether or not a company has or
has not finally got a matter for which they are liable.[34]
When to report proceedings?
5.31
Several submissions drew attention to the
changing nature of litigation and whether disclosures can be meaningful where,
at an early stage of proceedings, a company may have only one defence, to deny
the allegations because that is the only defence it can make at that stage of
the proceedings. Mr Paul Evans, a partner with Freehill Hollingdale & Page,
advised the PJSC that “the nature of the types of allegations that are made,
particularly in the trade practices context, are such that it is almost impossible
to state a position at an early stage in the proceedings which is meaningful,
other than to simply deny.”[35]
As an overriding point, statement of claims might be struck out or amended and
in this situation a company would be required to summarise each new allegation:
Ms JULIE BISHOP - My other question related to your comment about companies
having to report proceedings against them for breaches of Corporations Law or
trade practices law and 'a summary of the allegations'. This additional
reporting requirement beyond what we currently have, and where directors'
reports or annual reports contain details of foreshadowed or current court
cases, could lead to situations-and I presume this is what you are
suggesting when you say that it is absurd-where allegations, however ill-founded
or vexatious or even bizarre-and I have seen them all, as no doubt you
have, in statements of claims against companies-would have to be
disclosed. Yet as we know, statements of claim can be ever changing feasts of
allegations and, from time to time, allegations are struck out or the
statements of claim change in their entirety. Is that then one of the problems
you see with this additional reporting requirement?
Mr Wilkin - I think the reporting requirement says that the company has
to state its attitude-
Ms JULIE BISHOP - To each allegation.
Mr Wilkin - To each allegation. In other words, it has got to put in a
defence, a public defence or something like that, which I would regard as
absurd. It seems to me contrary to the due administration of justice to require
somebody to put their legal defence on the public record.
Ms JULIE BISHOP - Obviously once an allegation has been aired-and it may
well have been subsequently struck out by a court-it could have an
ongoing impact on share price, investor confidence and the like?
Mr Wilkin-It
could have an effect upon the proceedings against it, surely. If it made a
breach of trade practices law, then it can have proceedings against it.
Depending on where it is, it might have class actions, that type of thing,
against it; and its report would be discoverable, I suppose.[36]
Qualified privilege to attach to
disclosure
5.32
An issue not raised in the written submissions
but discussed at the PJSC’s public hearing related to the status of the summary
of the alleged breaches. In disclosing proceedings against it, a company must
summarise the alleged breaches or offences. A statement of claim may contain
defamatory material and a company’s summary of the claim, without the
protection of qualified privilege, has an uncertain status. Proceedings under
the Trade Practices Act demonstrate this point:
ACTING CHAIR-In relation to
the second aspect, the requirement to summarise allegations and the company’s
position under Corporations Law or trade practices, have you considered what
would be the status at law of the company’s response? Currently, if there is a
statement of claim in, say, a trade practices proceedings, it can contain all
sorts of allegations in relation to what might constitute misleading and
deceptive conduct. There could be all sorts of defamatory imputations arising.
I assume that under this the company would be obliged to set them out, or at
least the substantial aspect of it, and then its response which might also
reflect upon the plaintiff applicant. Have you considered the status in terms
of defamation of what would be covered by privilege?
Mr Evans-There would have to be an argument that if a
disclosure of that nature is required by law it would be covered by qualified
privilege. That, however, is by no means clear. One would certainly want to
ensure that that privilege attached. To take an example, your standard
statement of claim published by the commission against a trade practices
contravener these days will generally join in the officers involved in the
contravention who are directly personally liable. The company publishes the
report that the company and X, its chief marketing officer, have been
prosecuted for a contravention of section 45 or 45A relating to price fixing.
That is one impact. It has a direct and immediate impact upon the individuals
concerned where blame may ultimately not be established.[37]
Unclear drafting
5.33
Several submissions drew attention to the
drafting of the proposal and, in particular, the term “material” breach. The
PJSC was told the requirements relating to “material” breach are very broad and
compliance may be difficult.[38]
For example, a breach of the Trade Practices Act may be minor, but the
financial penalty and the adverse publicity may be disproportionate to the
breach.[39]
Restrictions on reporting
5.34
The PJSC was told that any requirement for the
disclosure of such information should:
- Exclude "in-camera" proceedings;
- Be drafted in such a manner so as to prevent it being unfairly
manipulated by persons wanting to impose an unfair burden on a company;
- Exempt companies from compliance where disclosure would
constitute a contempt of court or harm its defence;
- Permit a company to apply for relief from compliance;
- Be restricted to proceedings brought by a governmental agency;[40]
- Be made only once a court has found against the company.[41]
Conclusions
5.35
In general, the evidence before the PJSC was not
supportive of the proposal. In the light of the continuous disclosure regime,
it is difficult to assess the benefits arising from disclosures of this type
particularly if a company’s defence is a denial of the statement of claims or
the alleged breach has not been proven. The institution of proceedings is not
by itself proof that a breach has occurred or that an offence has been
committed. If the proceedings have only been initiated, then it is premature
for a company to declare its position in relation to the alleged breaches.
Further, the nature of proceedings under the Trades Practices Act is such that
the reporting of allegations or claims of breaches under section 52 can be
misleading. As one witness told the PJSC, an allegation in these proceedings
“is no more than just that.”
5.36
The PJSC considers that legal proceedings should
not be the subject of company reporting beyond the usual continuous disclosure
requirements for reporting entities. When proceedings have commenced any
written statements or admissions could be used against the company in
litigation to the detriment of the company and its shareholders. Moreover,
there is the difficulty in determining whether qualified privilege should
attach to the company’s summary of the statement of claim, especially where
these contain defamatory imputations. The PJSC is also concerned about the high
cost of compliance. This was estimated at over $750,000 annually for a large
listed company. In the view of the PJSC the requirement is misplaced and should
not be legislated. However, as a matter of corporate governance, companies
should disclose the instituting of proceedings or make a fuller report when these
have been concluded.
Recommendation
5.37
The PJSC recommends that the Corporations Law
should not require companies to report any proceedings instituted against the
company for any material breach of the Corporations Law or the trade practices
law.
Navigation: Previous Page | Contents | Next Page
Top
|