CHAPTER 2
ISSUES ARISING FROM THE BILL
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:
We believe the first bill and now the second bill have made very
important improvements in the simplification of both the wording and
the policies of the legislation. We are very impressed by the consultative
process which has gone on in formulating these bills and, in particular,
by the role of the Task Force in going out of its way by meeting various
groups and holding various testing sessions in making sure that the
views of virtually all people involved in this area have been taken
into account. [5]
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.
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:
(a) an apparently unintended consequence in proposed section 246E(1)(iv)
which will require proprietary companies as well as public companies
to lodge with the ASC any agreement which binds a class of shareholders;
[6]
(b) proposed section 250A(4)(b), which states that a person who receives
two or more proxy appointments that specify different ways to vote on
a resolution must not vote on a show of hands - it was suggested that
this provision might disenfranchise a proxyholder who is also a shareholder
from voting in his or her own right on a show of hands; [7]
(c) proposed section 250D(3), which enables a body corporate to appoint
multiple representatives only one of whom may exercise the body corporate's
powers at a meeting - it was suggested that the Bill should provide
a means of determining which representative may exercise the powers;
[8]
(d) proposed section 250Q, which states that a company may effectively
hold an AGM if it has held a general meeting during the relevant AGM
period and that meeting dealt with all matters required to be dealt
with at an AGM - it was suggested that this provision might result in
AGMs being held though not identified to members as such, and might
be used in some way to avoid the proposed right to question management
and auditors at an AGM under sections 250S and 250T; [9]
(e) the provision in proposed section 251A(2)(c) which authorises a
director who was at the meeting to sign the minutes of the meeting -
it was suggested that, particularly where directors are in dispute,
contradictory versions of minutes - each signed by a different director
- might be produced, each creating a contradictory onus of proof against
other directors; [10]
(f) proposed section 260A, which permits a company to provide financial
assistance for the acquisition of its own shares in certain circumstances
- it was suggested that this provision as drafted might enable shareholders
to approve the giving of assistance even though it materially prejudices
the interests of the company or its ability to pay its creditors, [11]
and that, on a literal reading, providing "financial assistance"
might include simply paying a dividend in the normal course of business;
[12]
(g) proposed section 292, which identifies organisations required to
prepare annual financial reports and directors' reports - it was suggested
that wholly owned subsidiaries should not have to comply with these
requirements when their debts are guaranteed by their parent: "this
would simplify substantially the present formal reporting requirements
and bring the law into line with the position achieved by an ASC Class
Order at present"; [13]
(h) the requirement in proposed sections 297 and 306 that financial
statements and notes give a true and fair view of a company's financial
position - in accounting and auditing terminology this term apparently
relates only to the balance sheet, and does not include a company's
operations, profit and loss or cash flows; [14]
(i) proposed section 348, which sets out the contents of a company's
annual return - it was suggested that, for the benefit of users of the
ASC database, this information should continue to include details of
a company's auditor (if any); [15]
(j) whether the Bill should acknowledge that redeemable preference
shares [16] may be classified as a
liability in financial reports when they exhibit the characteristics
of a liability - this approach is said to be consistent with an International
Accounting Standard and proposed Australian standards; [17]
(k) whether the Bill should insist, in all circumstances, that persons
who take up shares when an organisation demutualises, [18]
or a company changes to a company of a different type, must agree in
writing to take up those shares, or whether the Bill should incorporate
a degree of flexibility depending on the number of persons who must
be contacted or the size of their entitlements to shares; [19]
and
(l) an apparent drafting error in existing section 327 of the Law as
proposed to be amended by item 427 in Schedule 2 to the Bill - it was
suggested that section 327 as amended would now read "subject to
this of that Chapter ...". [20]
2.9 The remainder of this Chapter discusses a number of broader issues
which arose during Committee consideration of the Bill.
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:
it is now time that the Corporations Law itself authorises (ie
without requiring any further authority per the company's constitution)
electronic communication as a means of notification by a Listed Company
to an investor and vice versa. This would include electronic notification
by the Company to the shareholder of notices of meeting, annual reports,
dividends and rights entitlements and other information currently required
to be sent in documented form to the shareholder and by the shareholder
to the Company of the shareholder's proxy vote. [22]
2.12 AIMA went on to observe that:
- the only safeguards needed where a listed company provides information
electronically to a shareholder would be compliance by the company with
the notification details provided by the shareholder, and the right
of the shareholder to later require the company to provide that information
in documented form;
- proposed section 250B(4) would provide adequate safeguards to cover
the electronic communication of a shareholder's proxy vote; and
- a number of US and other listed companies were already making their
annual reports and other shareholder material available on the Internet,
and that it would be sensible to amend the Law to give specific recognition
to this quickly developing trend. [23]
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]
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:
it should be possible for shareholders to vote by post, fax or
other electronic means, without the necessity of appointing a person
to act as proxy and exercise their vote at the meeting. This historical
mechanism has led to the provisions in the bill which deal with whether
a proxy is obliged to exercise the appointer's vote. We think that this
problem could be completely avoided if the fact of voting by post or
electronic means were recognised. As I have mentioned in our written
comments, there is some precedent in the draft collective schemes bill
which was included in that report providing for postal voting; and we
are suggesting that this should be embodied in the legislation. [26]
2.16 This view was supported by AIMA, among others, who illustrated the
effect of the trend internationally:
All the major banks around the world, of which there are many
hundreds, are connected to an electronic secure network called SWIFT,
which is based in Brussels, I understand. So you have got a situation
now where an institutional investor in, let us say, Germany that has
an investment in an Australian company, through its subcustodian bank
in Germany can vote electronically through the SWIFT network back to
the custodian in Australia, who might be Westpac Custodian Services.
So a foreign institutional investor can actually currently vote electronically
back to the custodian, but an Australian institutional or other shareholder
cannot vote the same way under the current provisions. [27]
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.
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:
if you have got a company that has got directors located in Perth
and Sydney and a directors' meeting is called, it may be that just before
the meeting is held the Sydney director, one or more of them, may say,
'We no longer consent to a telephone meeting.' It is too late for the
Perth man to come to the meeting in Sydney and therefore he is denied
the chance to participate in the meeting and cannot vote. Because it
is the consent of all, it is the right of each director to refuse consent,
therefore it can be used against others. So, whilst it is an admirable
provision to advance the cause of all companies, there is a hidden sting
in there which can be abused. [29]
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:
- the intended use of that technology should be known to all participants
at the meeting; and
- the Bill or 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.
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:
ASX has developed a facility for the lodgment of documents electronically,
to provide a more efficient mechanism for the receipt of information
and release of it to the market. This facility cannot be used where
accounts are being lodged with ASX as agent for the ASC. [31]
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:
(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.
|
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):
We think it is very important that minority independent directors
should have that up their sleeve. It improves their bargaining position
hugely with the other directors, and the reality is that they will be
pretty careful before they exercise that power because, if they exercise
it wrongly, there is the majority of the board sitting there who will
whack them with a law suit, and that would include the costs of convening
the meeting, etc; so there is a pretty well inbuilt protection there.
[32]
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. |
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:
- members with at least 5% of the votes that may be cast at the meeting;
or
- at least 100 members who are entitled to vote at the meeting.
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.
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:
Clearly, where a director under the company's constitution has
no power acting alone to convene a meeting on the requisition of members
and he or she uses reasonable steps to cause the company to convene
a meeting, he or she should not be required to contribute to the costs
of calling the meeting. [35]
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.
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]
The reason that 249F is objectionable is that there are several
reported court cases where the boards have been requisitioned, using
the more normal power [ie the current equivalent to proposed s 249D],
to convene meetings to discuss matters which are quite improper in a
legal sense. They are improper in that the meeting has no power to vote
on the resolution, the subject of the requisition ... As a result of
those court cases, it is usual and proper that, when a requisition comes
in under the existing provision, it comes into the board. The board
then has the power to correspond with the requisitioners and say to
them, 'You have not taken into account the fact that resolutions Nos
3, or 4, or 5, are invalid for the following reasons, therefore they
cannot be put. Would you please recast your requisition, or withdraw
your requisition altogether, if, in fact, there are no resolutions that
can be validly passed'...
That is a proper filtering process. That is what has been going
on for years. What is now proposed in 249F is to give the power directly
to the minority shareholders to convene the meeting. The consequences
of doing that, in my example ... are that that meeting would have been
convened directly. There would be seven resolutions there. What would
the company do in response? It would huff and puff and say to the requisitioners,
'You should not have called that meeting.' However, it is there on the
table. The meeting is already organised; notice has gone out to the
several thousand shareholders, and proxy forms are coming in. What are
they supposed to do?
The answer is that they go to court. They spend the company money
on trying to set aside the meeting as being invalid. Or they pull their
heads in and say, 'All right. Let us front up to the meeting ... we
will turn up to this meeting even though we know that the resolutions
cannot be validly passed.' The resolutions are framed in an embarrassing
way, and deliberately so. They are designed to generate publicity. So
it is an abuse of process.
That is what is being afforded by 249F. If you give the power
directly to the shareholder, it will be abused for improper purposes
and it will not serve the purpose of actually generating something useful
for the meeting. [38]
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:
- it had been urged to retain the provision during its discussions with
business groups and shareholders;
- the provision had a role in cases where all directors of a company
had resigned;
- the potentially 'tactical' use of the provision was recognised, but
the right had been vested in 5% of members - a proportion of members
having a significant economic interest in the company - and would involve
those members in significant expense; and
- the Bill should be amended to clarify that such a meeting could only
be called for a proper purpose. [40]
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:
(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.
|
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:
- there were often significant delays in the receipt of material, due
to late dispatch by a third party mailing house, and the requirement
that the material be passed on from the first recipient (the registered
custodian, in whose name the shares were registered) through further
intermediaries until it finally reached the manager with voting authority;
- any time period nominated was often shorter given the way that weekends
and public holidays fell during the period;
- the material received was often detailed, complex and bulky, and required
extensive consideration;
- voting instructions had to be passed from the voting manager back
to the registered custodian - again a document/time intensive process;
and
- in nearly all cases, proxy forms had to be posted so that they were
received by the company at least 48 hours prior to the meeting - a deadline
that might again be affected by weekends or public holidays. [43]
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. |
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:
These provisions will not affect the chairperson's power under
the common law to run an orderly meeting. In particular, the chairperson
will not necessarily be required to allow each member who wishes to
do so an opportunity to ask questions ... The chairperson will be able
to move on to the next item on the agenda when they consider that there
has been a reasonable time for questions, taking into account all the
circumstances of the meeting. [48]
2.57 The evidence put before the Committee on these two proposals is
outlined below.
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]
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":
Our concern is that this section has the potential to seriously
disrupt the conduct of annual general meetings, damage the auditor/member
relationship and increase the liability of the auditor.
Although section 250T seeks to limit questions to those relevant
to the conduct of the audit and the preparation and content of the audit
report, this will be difficult to enforce in practice. Definitional
problems are bound to arise, particularly as the Bill does not define
what a question relevant to the conduct of the audit and the preparation
of the audit report is. Members are most likely to be unaware of any
restriction in their right to ask questions. [54]
2.63 To illustrate the potential difficulties, KPMG canvassed some of
the types of question that might be directed to auditors:
- questions concerning the audit report and any qualification it contained
would clearly be within the members' right, however auditors might seek
to draw a distinction between questions on the preparation of the audit
report and questions on a particular accounting method used or the subject
matter of a particular qualification;
- questions concerning information contained in the financial statements
or the annual report would not fall within the members' right, however
chairmen might have difficulty in explaining to members why directors
should answer this question rather than auditors;
- questions concerning particular aspects of how the audit was conducted
would fall within the members' right, but may be unreasonable as the
appropriateness of the procedures used in forming an opinion on the
financial statements should "not be open to second-guessing by
shareholders";
- questions as to individual line items in the financial statements
(such as, for example, whether the carrying value of land and buildings
was appropriate) may or may not fall outside the members' right;
- questions as to the adequacy of internal controls arguably fall outside
the members' right (the auditor does not provide any opinion on internal
controls as part of the audit) but are arguably within the conduct of
the audit - answers to such questions would probably be heavily qualified
by disclaimers, and of little benefit to members;
- questions as to the quality and integrity of directors and management
are probably outside the members' right, though it might be argued that,
as part of the conduct of the audit, the auditor will have formed a
view on this issue and therefore the question should be answered;
- questions as to future prospects of the company would be outside the
members' right, but nevertheless had the potential to disrupt a meeting
if not answered. [55]
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:
Our partners do attend annual general meetings. We would not
want them forced to attend. We like the pressure of competition, and
turning up is a good image. We would not want auditors having to turn
up to the AGMs of subsidiaries. We do answer questions. We would not
want to 'have to' answer questions, because we do have duties of confidentiality
about the information we have learned. We are not covered by qualified
privilege under section 1289, so we would want that privilege if we
were required to answer.
We think the current legislation is fine. Yes: the shareholders
have the opportunity of asking questions. Yes: the chairman can deflect
them or answer them himself. The questions are restricted to the conduct
of the audit or the contents of the audit report. We think the current
wording is quite suitable, being non-mandatory in not 'having to' answer
the questions. [59]
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]
2.69 Not surprisingly, shareholders and their representatives spoke strongly
in favour of the right to question, particularly to address questions
to auditors:
The auditors are appointed to report to the shareholders, and
it seems to me quite ludicrous that the shareholders cannot ask them
questions. It is as simple as that. As for this idea that the chairman
should sanitise questions, there is absolutely no justification for
that at all. The auditors are there as a very important part of the
corporate governance structure. They are the independent person looking
at the directors' accounts and telling shareholders who are not involved
in management whether the accounts are right. They are actually, if
you like, the shareholders' watchdogs ...
Most auditors are pretty experienced. At most of the meetings
I have been to, they are pretty good at knowing when and when not to
answer. I actually do not think it is a practical problem. The auditor's
interest in his own self-preservation will make sure that he is very
careful how he answers questions. [64]
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:
(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.
|
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:
- in practice, proxy voting via a registered custodian was the only
feasible means of voting for many institutional investors;
- it is not meaningful for a registered custodian to vote on a show
of hands because of the multiplicity of voting managers whose instructions
the custodian represents;
- consequently, those investors (who represent a substantial proportion
of voting capital) are effectively disenfranchised from voting on a
show of hands;
- the vast majority of resolutions at listed company meetings are passed
on a show of hands - this is a source of major concern among AIMA members
and other institutional investors. [66]
2.79 Such an approach was said to have the following benefits:
- effective enfranchisement of all investors without in any way preventing
investors who attend the meeting from raising issues or asking questions;
- transparency of all voting;
- ease and transparency of reporting by AIMA members and other institutions
to their clients; and
- a method of shareholder decision-making which is in tune with the
Australian and international investment market, and which is similar
to the method of shareholder decision-making in the world's largest
investment market (USA) and easily understandable to US and other foreign
institutional investors.
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:
... this information is known to the Chairman (and usually other
officers of the investee company). Those officers are the agents appointed
by the investors to run their company for them and those agents should
not be in a position to withhold from their principals, as currently
happens in many cases, information relating to the exercise by investors
of one of their most important rights. [67]
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):
The entire matter of the exercise of voting rights is of great
concern to custodians. This matter is currently fraught with inconsistencies
and lack of clarity. Whilst the Bill would make some improvements, the
opportunity to make substantial improvements has not been taken. A complete
revision of the matter is urged. [69]
2.84 If the proposals in the Bill were to be retained, NCS suggested
that:
- there be no statutory limit on the number of proxies a member may
appoint, [70] and no limitation on
a proxy's capacity to exercise the vote (whether on a show of hands
or on a poll);
- particular forms of appointment not be insisted upon by companies;
- standing appointments of proxies, etc need only be provided in full
once; and
- companies be permitted to appoint more than one voting representative
at a meeting, provided that the number of shares over which each appointment
is made is specified.
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:
(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.
|
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:
- the amount paid on the share is the sum of all amounts paid to the
company at any time for the share (excluding any premium); and
- the amount unpaid on the share is the difference between the share's
issue price (excluding any premium) and the amount paid on the share.
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:
A potential investor trying to gauge the size of a shareholder's
interest in a company would need to look beyond the par value of the
shareholder's shares, because par value is simply an arbitrary monetary
denomination attributed to the shares ... The fact that the shares have
a par value of, for example, $1 each would give no indication of the
current value of the shares. [74]
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:
In other countries where no par value shares have been allowed
the relevant government has chosen to allow companies already established
to maintain their par value structure. There is no evidence from these
countries that the retention of this form of choice has led to manipulation
or the misuse of the alternative. [76]
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:
ASX has expressed concerns to the Task Force that a transitional
period giving a period of notice of the change to the new regime is
essential. The Task Force has indicated sympathy with those concerns
and suggested that they could be addressed by delaying proclamation
of the legislation, once enacted, for a period of six months. ASX considers
that it would be preferable for a fixed transitional period to be actually
contained in the legislation, to give certainty ... [77]
2.96 Potential tax problems raised before the Committee included:
- the potential activation of the capital gains tax or general anti-avoidance
provisions of the Tax Act, or other statutory provisions, where rights
attaching to shares which constitute a separate class by virtue of their
different par value are changed; [78]
- the loss of the ability to pay tax-free bonus issues from the share
premium account; [79]
- ordinary shares issued on the conversion of converting preference
shares will not now be credited as fully paid by application of the
company's share premium account - it is unclear whether such shares
may be treated as taxable dividends; [80]
and
- a general lack of clarity in determining whether existing rights and
entitlements of shareholders will be retained; [81]
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:
- the taxation legislation draws a distinction between distributions
of profit and capital to shareholders;
- distributions of capital are generally treated more favourably in
the shareholder's hands than are distributions of profit, particularly
where shareholders hold shares acquired prior to the introduction capital
gains tax;
- the taxation legislation currently treats a distribution to a shareholder
from the share premium account as a distribution of capital - this may
lead to attempts by companies to "stream capital payments to those
shareholders who could obtain the greatest advantage from a receipt
of capital"; and
- shares which differ in the amount of their par value currently constitute
different classes of shares, and the taxation legislation currently
distinguishes between different classes of shares (for example, in relation
to the distribution of franking credits). [82]
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:
if a company enters into an arrangement equivalent to subsection
6(5) or pays bonus shares out of profits (ie substitutes capital for
profits or capitalises profits in association with the issue of bonus
shares), the substituted or capitalised profit will continue to be treated
as a dividend in the hands of the shareholders to whom the shares are
issued. [83]
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. |
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.
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:
A management discussion and analysis is a perhaps somewhat unstructured
and verbal report made by the directors on the operations of the company.
It could contain things like a discussion of the dynamics of the business,
what its business risks are, what its competitive advantages are, what
effect technology has on it and its risk management strategies and things
like that.
It could then go on and discuss the operating results, just how
the company went during the year, why it made the result that it did,
why it is better, why it is worse, than in the past and the factors
that influenced that result, new products and services that have been
introduced that enhance the result, changes in market position and that
sort of thing.
It would then go on and discuss capital and other expenditure
that the company made during the year and how that is likely to contribute
to, hopefully, even better prospects in the future. It could discuss
the treasury policies of the company and what the company is doing in
terms of hedging prospects in the future. It could discuss the treasury
policies of the company and what the company is doing in terms of hedging
exposures and risks. It could go on generally to discuss the other factors
that influence the company, like environmental issues and any other
strong, extraneous influences on the company ...
We very strongly support the inclusion of this sort of thing
in a set of annual accounts ... and we believe that the story, if you
like to think of it that way, is an essential ingredient in investors'
understanding what makes the company tick.
As an indication of the interest in management discussions and
analysis, two very recent research studies have been done. The Australian
Society of CPAs' Centre of Excellence on External Reporting has just
produced a booklet on management discussion and analysis and suggestions
for what should be in it. And the Group of 100, which is the chief financial
officers of the 100 biggest companies in Australia, has also produced
their booklet discussing what should be in it. It is a very keen issue
at the moment and we are for it in no uncertain terms. [87]
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:
- that the words 'discuss and analyse' lacked the specificity of the
existing provision; [90] and
- that it was not clear what additional information should be provided
to show the 'overall financial position of the company', with the possible
result that directors may embark on full scale due diligence exercises
to fulfil their responsibilities under the section. [91]
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":
There may be material that is unfavourable to the company, but
not confidential, that the directors would prefer not to include. Apart
from the difficulty of monitoring, allowing such a wide "carve
out" makes it virtually impossible to enforce these paragraphs.
All unfavourable information may be omitted by the directors ...
We therefore recommend use of the carve out be reviewed in say,
two years time in light of practical experience. [92]
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:
It is our feeling that having the directors discussing and analysing
things will ultimately lead to better quality reports to shareholders.
It is possible to particularise information in a mass of detail without
really being informative. The path that we are going down is a path
trodden in overseas jurisdictions where a practice is built up which
has resulted in satisfactory reports. At the end of the day, the legislation
can go so far in mandating informative disclosure; market practice is
going to have to do a lot of the work itself. The maintenance of the
current rule, we feel, will not necessarily lead to the best informed
markets. [94]
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).
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:
- 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; [95]
- 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 - these matters were currently disclosed in many company
annual reports;
- 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. [96]
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:
(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 Chief Executive Officer;
(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.
|
Footnotes
[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).
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