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:
The Committee recommends that:
(a) the Bill should more extensively recognise electronic
forms of communication between companies and their members,
and regulatory authorities; and
(b) the Law should make clear that, where it is proposed
to hold a meeting using the assistance of technology, the
participants at the meeting should be aware of:
(i) the intended use of that technology;
(ii) the effect on the meeting of any failure of that technology;
and
(iii) for directors' meetings, the effect on the meeting of
any withdrawal of consent to its continued use [see page 14
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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:
| The Committee recommends that the right of an individual
director to call a meeting of members should be a mandatory rule
for listed companies [see page 15]. |
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:
The Committee recommends that:
(a) where members call a general meeting under proposed section
249E, only those directors who fail to take reasonable steps to
convene the meeting when requested under proposed section 249D
should be liable to reimburse the company for the expenses incurred
in calling that meeting; and
(b) the Bill should make clear that the power of members to requisition
or convene a general meeting should not be exercised frivolously,
and should be exercised only where the purpose of the meeting
is a valid purpose for such a meeting [see page 18].
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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:
| The Committee recommends that, as a general rule,
for listed companies, the minimum notice period for a members'
meeting should be 28 days [see page 20]. |
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:
| The Committee recommends that:
(a) the Law should be amended to require the auditor of a listed
company (or the auditor's representative) to be available to
take questions at the AGM at which the auditor's report is tabled;
and
(b) the Bill or its Explanatory Memorandum should specifically
refer to the applicability of qualified privilege to answers
to questions put to auditors by members at an AGM [see page
25].
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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:
The Committee recommends that further consideration
be given to the issue of voting at meetings, with particular reference
to:
(a) developing a standardised proxy form which will enable
all shareholders to express the full range of their voting
intentions; and
(b) requiring the chairman to call for a poll:
(i) if so instructed by a required number of the proxies held
by him or her; or
(ii) if the vote on a show of hands does not reflect the votes
of the proxies held by him or her [see page 28].
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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 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
[see page 31]. |
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:
With regard to the annual directors' report, the
Committee recommends that:
(a) proposed section 299 stand unamended, but be reviewed
three years after its implementation; and
(b) proposed section 300 be amended to additionally require
listed companies to disclose the following matters:
(i) the policies of the Board 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;
(ii) 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;
(iii) the age and all other listed company directorships of
each director;
(iv) whether, during the reporting period, any proceedings
were 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
(v) whether, during the reporting period, any such proceedings
were concluded or settled and (if so) the terms on which they
had been [see page 36].
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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:
| The Committee recommends that the Corporations Law
should require that information disclosed by Australian listed
companies in overseas jurisdictions should be promptly and prominently
announced via the Australian Stock Exchange to Australian investors
[see page 38]. |
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:
| The Committee recommends that consideration be given
to the desirability of including in the Bill a provision giving
the members of a class of shareholders the right to request and
convene a meeting of that class to consider matters able to be
dealt with at such a meeting [see page 38]. |
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:
| The Committee recommends that the ASC reconsider
the criteria to be included in its Draft Class Order covering
audit relief for large proprietary companies to remove any unnecessary
audit burden from franchised motor dealers or businesses in similar
circumstances [see page 41]. |
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