CHAPTER 3
ADDITIONAL MATTERS
3.1 The Second Bill concerns itself with specific matters as determined
by the Corporate Law Simplification Program. Some suggestions were made
to this Committee that other matters ought to be dealt with in the Bill,
or in subsequent legislation. A number of these suggestions are canvassed
below.
3.2 CGI expressed the view that it should be mandatory under Australian
corporate law for disclosures made by Australian listed companies in overseas
jurisdictions to be promptly and prominently announced via the ASX to
investors in Australia. The Australian announcement should summarise the
nature of the overseas disclosure and whether and (if so) how it may differ
from any disclosure made by the company to the Australian market. The
announcement should also state that the full text of the overseas disclosure
would be supplied to Australian investors promptly and without charge
by the company.
The overall objective is to ensure that Australian investors
in Australian listed companies are accorded world best practice in disclosure
...
In particular, these reforms will address concerns that some
investors through overseas connections or special relationships with,
or unqualified support of, board and/or management of investee companies
may receive more advantageous information or treatment than others.
[1]
3.3 To demonstrate that this was a material issue, CGI mentioned the
case of one major Australian listed company which had positively declined
to make available in Australia the disclosure which it had provided in
the US under SEC requirements. This company's justification for its refusal
was that disclosure in Australia was not mandatory. CGI also pointed out
that:
- there was a degree of uncertainty as to whether the 'continuous disclosure'
rule meant that such information had to be made available locally; and
- this proposal was a natural consequence of international markets imposing
global standards on financial disclosure. [2]
3.4 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.
Such a provision should 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. |
3.5 The Committee was told that the original proposal for simplification
(though not the June 1995 Exposure Draft) 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. The ASX drew the Committee's
attention to the unexplained omission of this proposal from the Bill.
[3]
3.6 In the absence of an explanation for the removal of this provision,
the Committee cannot evaluate the need for its inclusion. The Committee
notes the extensive protections that are given to class rights elsewhere
in the Bill. It may be that such a provision would complement 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.
|
3.7 Some submissions revisited the matter of financial reporting by 'large'
proprietary companies [4] - a matter
covered in the First Corporate Law Simplification Act 1995, and discussed
in this Committee's report on the legislation tabled in March 1995.
3.8 The Committee is also aware of continuing expressions of concern
regarding the exercise by the ASC of it's discretion to grant relief under
section 313 of the Corporations Law from the requirement to prepare audited
accounts. This discretion may be exercised in favour of an individual
company or a class of companies, and was discussed in this Committee's
August 1995 Report on Items 1-4 of Schedule 4 to the First Simplification
Bill.
3.9 In that Report, the Committee recommended that section 313 should
contain some criteria which should govern the exercise of the discretion.
These recommendations were subsequently adopted in the Corporations Law.Under
current section 313(11A), in deciding whether the audit requirements for
a large proprietary company (or a class of such companies) would impose
an unreasonable burden on that company or those companies, the ASC is
to have regard to:
- the expected costs and benefits of complying with the audit requirements;
and
- any practical difficulties that will be faced in complying effectively
with the requirements; and
- any unusual aspects of the operations of the company or companies
during the financial year concerned; and
- any other matters that the ASC considers relevant.
3.11 Under current section 313(11B), in assessing the expected benefits
of compliance, the ASC is required to take account of the number of creditors
and potential creditors, the position of these creditors - in particular
their ability to independently obtain financial information about the
company or companies - and the nature and extent of the liabilities of
the company or companies.
3.12 This Committee also recommended that:
- any exercise of the ASC's power should be preceded by extensive consultation
and public scrutiny; and
- the three tests for determining whether a proprietary company was
large or small (and therefore exempt from the reporting requirements);
the criteria which should govern the exercise of the ASC's discretion
to exempt large proprietary companies from the requirements; and the
effectiveness and cost of the process should be reviewed after a period
of two years. [5]
3.13 The AARF drew general attention to some problems that had been encountered
with the application or interpretation of the small/large test by the
Accounting Standards Board. The legislation had included a 'size' test
for the purpose of determining which companies should be required to lodge
accounts. The Accounting Standards Board had taken the view that the 'size'
test should similarly be applied to determine which companies should be
required to conform to accounting standards. AARF summarised its view
as follows:
We believe that parliament needs to clarify what its intentions
were in relation to the use of the small versus large proprietary company
test so that the standard setters fully understand what parliament's
intention was, because there is great debate going on out there at the
moment ...
One of the difficulties we had last year was knowing just how
many large proprietary companies are likely to be affected. We will
have the details on that with the lodgments at June 1996. So I guess
we are foreshadowing that early in 1997 we may wish to see the debate
reopened once we know just what number of companies we have in place.
[6]
3.14 The Committee is aware of some general problems that have arisen
with the application of the test to certain classes of 'large' proprietary
companies.
3.15 The Committee is also aware of problems that have arisen with the
application of the test by the ASC. In particular, correspondence from
the Motor Trades Association of Australia (MTAA) has raised concern about
a proposed ASC Draft Policy Statement for Audit Relief for Large Proprietary
Companies and Draft Class Order.
3.16 The MTAA argued that the particular circumstances applying to the
financial relationships of retail motor traders should result in their
exemption from audit, despite being categorised as 'large'. The MTAA claimed
that the Class Order negotiated with, and expected to be promulgated by,
the ASC had recognised this, and would have relieved franchised motor
dealers from the obligation to conduct an audit. The external and internal
costs of an audit were estimated to be in the order of $25,000.
3.17 However, two last-minute additional qualifications included in the
Class Order by the ASC will effectively deny some franchised motor dealers
relief from this onerous expense. These qualifying elements are:
- that the total liabilities of the company did not exceed 70% of total
tangible assets and the total consolidated liabilities did not exceed
70% of the total consolidated tangible assets; and
- that the company has a positive cash flow for each quarter.
3.18 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.
3.19 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.
|
Senator Grant Chapman
Chairman
Footnotes
[1] Submissions, p 274.
[2] Evidence, p CS 93 (Mr Wozniczka).
[3] Submissions, p 6.
[4] For example, Submissions, pp 22-3 (Ernst
& Young); p 264 (VECCI); pp 312-13 (Group of 100 Inc).
[5] Parliamentary Joint Committee on Corporations
and Securities, Report on Items 1-4, Schedule 4, of the First Corporate
Law Simplification Bill 1995, (August 1995), paras 3.2 and 3.3.
[6] Evidence, pp CS 7-8 (Mr Boymal and Mr Reilly).
See also Submissions, p 265 (VECCI).
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