By Email

17 November 2003

The Secretary 
Parliamentary Joint Committee on Corporations & Financial Services
Room SG.64
Parliament House
CANBERRA  ACT  2600

Dear Dr Dermody

CONFIDENTIAL SUBMISSION

CLERP 9 – Committee Inquiry into the Exposure Draft

Summary of submission

•	There has been considerable concern recently about the masking of beneficial interests in shares.
•	The Corporations Act already contains “tracing” provisions in Part 6C.2. These enable each listed company – and ASIC – to send out notices requiring the recipient to disclose information about everyone they know to have an interest in the shares they hold.
•	Before 1996, information disclosed under the tracing provisions was required to be kept, by each listed company, in a publicly accessible register.
•	This register requirement was repealed by the First Corporate Law Simplification Act 1995.
•	The tracing provisions in Part 6C.2.of the Corporations Act should be strengthened by reinstating the pre-1996 register requirement and making that register available for public inspection.
•	This would align Australia’s tracing provisions with those in the United Kingdom.

•	Support for the re-introduction of the register requirement can be found in this passage in the judgment in Brunswick NL v Blossomtree Pty Ltd (1992) 10 ACLC 658 at 667: “It is in the interests of shareholders, current as well as past, to have information as to the real owners of shares which may influence the future of the company and their future as shareholders and which indeed might impact upon the management and control of the company.  It is also in the market interest to know those matters and whether or not any such shares were acquired illegally.”

Outline of the Tracing Provisions

Part 6C.2 of the Corporations Act gives ASIC and listed companies the power to send out notices (called tracing notices) requiring a registered shareholder (member) of a listed company to provide details about their own relevant interest in the company’s shares and the relevant interest of other persons in those shares.  This enables a listed company (and the regulator) to discover who has the beneficial interest in shares registered in the name of nominees (e.g. bank custodians).  It also assists in the proper functioning of the takeovers provisions.

For example, somebody may be secretly assembling a stake of just below 5% in a listed company, through several nominees, before making a takeover bid.  As their stake is below 5%, the substantial holding provisions (Part 6C.1) do not apply.

The main features of the tracing regime are:

•	A listed company can send out a tracing notice whenever it wishes to do so.
•	ASIC must send out a notice if requested to do so by a member of the company, unless ASIC considers that it would be unreasonable to do so in all the circumstances.  [In practice, ASIC charge a member of the company $540 for every notice they send out]
•	Generally, disclosure must be made within two business days after the person is given the notice.
•	When ASIC or the company receives the disclosure from the member, they can – if they wish – send a further tracing notice to any person named in the disclosure.  That is, it may be necessary to send “follow-up” notices where there are several layers of persons or entities sitting behind a nominee holding.
•	If someone fails to comply with a tracing notice, ASIC, the company or a member of the company can apply to the court.  The court has power to make a “remedial order” (section 9), under which the shares in question are frozen and disenfranchised – they cannot be validly transferred, their voting rights are nullified, and no dividends are payable in respect of them (among other things).

Public register of disclosed information

Pre-1996 position in Australia

Until 1996, the Corporations Law required information disclosed under the tracing provisions to be kept in a register.  Former section 724 required each publicly listed company to keep a register, and to make it available for inspection and copying.

In relation to inspection:
•	a member (registered shareholder) could inspect the register for free;
•	any other person could inspect the register on payment of a fee (if the company chose to charge a fee; if the company did charge a fee, a maximum amount was prescribed in the Corporations Regulations).

In relation to copying:

•	a member or any other person could request the company to give him / her a copy of the register or any part of it;
•	the company had to send a copy of the register to the person requesting it, within 21 days;
•	the company could choose to charge a fee, and if it did a maximum amount was prescribed in the Corporations Regulations.

While section 724 was in force, there was an ASX Listing Rule which supported it.  Under former Listing Rule 3A(16A), when a company received information under the tracing regime, a copy had to be provided to the ASX immediately.

Former section 724 was repealed by the First Corporate Law Simplification Act 1995. That Act also removed the requirement for several other registers to be kept. The rationale for the change was “simplifying” the requirements for corporate information and record-keeping.

United Kingdom

Former section 724 was based (broadly) on provisions in Part VI of the UK Companies Act 1985 – which are still in operation.

The main provisions are sections 211, 213 and 219.

In relation to inspection:
•	a member (registered shareholder) or any other person can inspect the register for free.

In relation to copying:
•	a member (registered shareholder) or any other person can request the company to give him / her a copy of the register or any part of it;
•	the company must send a copy of the register to the person requesting it, within 10 days;
•	the company can choose to charge a fee, and if it does a maximum amount is prescribed in a statutory instrument (regulation).

United States

By way of contrast, in the USA, mutual funds and funds management groups with greater than US$100 million under management, are required to disclose details of their portfolio holdings to the Securities & Exchange Commission every quarter.  This information is then publicly available.

There has been considerable public interest in disclosure of beneficial ownership information (particularly of interests held by institutional investors as retirement savings grow in superannuation and other managed fund vehicles).

International

Internationally, the OECD Steering Group on Corporate Governance which is looking at possible elements for revision, noted in one of its draft reports:

“During the Steering Group meeting as well as in the discussions in the Regional Roundtables it was observed that disclosure of ultimate beneficial ownership to company registrars in many cases is insufficient.  From the perspective of preventing corruption, terrorist financing and money laundering, the meeting also expresses support for greater disclosure and transparency in this area.  From the viewpoint of corporate governance it is important that company registrars are provided with this information on a continuing basis so that ownership and the potential for conflicts of interest remain transparent to shareholders, and indeed to the board.”

A recent survey released by the International Investor Relations Federation (Global Survey on Shareholder Transparency, September 2003 (see attachment 1)), also confirms that there is international support among listed entities and institutional investors for greater shareholder transparency around the world.

Conclusion

Institutional Analysis (IA) believes that CLERP 9 should be amended to require all listed entities to make beneficial ownership information available for inspection as is the case in the UK.  

IA believes that all shareholders and the market as a whole should be able to obtain this information.  Listed entities should not be allowed to keep this information confidential nor should a shareholder have to pay ASIC $540 to obtain information about one’s fellow shareholders.

Representatives of IA will very much appreciate an opportunity to appear before the committee to discuss this submission further.

Yours faithfully

Dr Geof. Stapledon
Director