Section 1

Report on the Company Law Review Bill 1997
Table of Contents

Section 1

Background

1.1 The Bill was introduced into Parliament on 3 December 1997. The Bill rewrites the core company rules affecting the way a company is run and is largely based on the Second Corporate Law Simplification Bill 1996.

1.2 The Bill redrafts and improves provisions of the Law dealing with:

1.3 The Bill also introduces for managed investment schemes rules which are similar to those that apply to companies in relation to members' meetings, financial reporting and annual returns.

Place in the Corporate Law Economic Reform Program (CLERP)

1.4 The Corporate Law Economic Reform Program (CLERP) was established by the government with the aim of improving the efficiency of corporate regulation. This Bill begins that process by simplifying and redrafting provisions of the Corporations Law in plain English. [1]

1.5 The next stage of CLERP, as foreshadowed to the Committee by the Parliamentary Secretary to the Treasurer, Senator the Hon Ian Campbell, will involve simplifying and redrafting the Law's provisions on fundraising, takeovers, directors' duties and corporate governance:

History of the Bill

1.6 In June 1995, an Exposure Draft of the Bill (the Second Corporate Law Simplification Bill) was released for public comment. Following a period of public consultation, the draft Bill was referred to this Committee on 26 June 1996 by the then Parliamentary Secretary to the Treasurer, Senator the Hon Brian Gibson AM. The Bill was at that stage a second Exposure Draft incorporating the comments of practitioners and other users of the Law.

1.7 The Committee's report on the draft Bill was tabled in the Senate on 18 November 1996. The Committee made 11 recommendations to amend the draft Bill which the government addressed in a separate response to the Committee's report. [3]

1.8 A number of significant changes have been made to the Bill since it was examined by the Committee. These are outlined below:

1.9 The Bill was introduced into the House of Representatives on 3 December 1997 and was passed by the House unopposed on 4 March 1998.

1.10 On 3 March 1998 the Senate referred provisions of the Bill to the Committee for inquiry and report by 23 March 1998. [4] This date was extended by the Senate to 30 March 1998 and again to 1 April 1998. [5]

Submissions to the Committee

1.11 The Committee received 13 written submissions concerning the Bill. A list of organisations and individuals that made submissions is at Appendix 1. The Committee held two public hearings on 12 March and 24 March 1998. A list of witnesses who gave evidence to the Committee during its public hearings is at Appendix 2.

1.12 When the Committee first considered the Bill in 1996, it had not been introduced into Parliament. The draft Bill had already undergone a prolonged process of consultation and public comment. The matters raised in submissions centred on specific issues rather than the general approach of the draft Bill, and as the Committee noted at the time, Almost without exception, there was general support for the Bill.[6]

1.13 The Committee's 1996 report was made against the background of that process of continuing refinement of the Bill. It was accepted that the Bill would undergo further development by the government before a final draft was tabled in the Parliament.

1.14 The Committee makes the same observations regarding its present inquiry into the renamed Company Law Review Bill 1997. While the Committee received many comments on the Bill, some critical of the omissions in the Bill, there was general approval for the government's corporate law reform program and in principle support for the Bill.

1.15 For example, the Australian Society of Certified Practising Accountants and the Institute of Chartered Accountants declared that The Accounting Bodies support the Government's Corporate Law Economic Reform program and the thrust of the substantive reforms in the Company Law Review Bill 1997. [7] At the same time, the Accounting Bodies recommended changes to the Bill's corporate governance framework. [8] The Australian Stock Exchange (ASX) stated that it had made a number of submissions to government on the Company Law Review Bill (and its predecessor, the Second Corporate Law Simplification Bill 1996) and many of the issues it raised were resolved in ways that meet ASX's concern. [9] However, the ASX highlighted several inconsistencies between its listing rules, the Law as it applies to companies and provisions in the Bill relating to voting and meeting requirements for managed investment schemes. [10]

Issues raised in submissions and evidence

1.16 Comments on the Bill ranged widely across the various provisions of the Bill. These can be divided into two categories: comments on the drafting of certain provisions of the Bill and comments as to the adequacy of shareholder protection and corporate governance structures in the Bill.

Drafting issues

1.17 The Committee notes that where it was asked to consider specific amendments to the Bill, in most cases the government already had received similar representation from the same organisations during the preparation of the Bill.

1.18 Clearly, at this stage of the Bill's consideration, the Committee is not able to offer a definitive judgment on the merits of the drafting issues raised and possible unintended consequences of the Bill. However, the Committee has made available to the government all of those comments on the drafting of provisions and the suggested amendments.

1.19 The drafting issues and matters of detail, which the Committee has addressed, include:

the threshold requirement for convening a general meeting at the request of members (section 249D)

1.20 Comments by the NRMA dealt with section 249D of the Bill, which reduces the threshold number of members who may requisition a general meeting from 200 to 100. The NRMA indicated that the current threshold was an unrepresentative figure (about .01% of its total membership). The lower threshold was even less representative. The NRMA stated: The ease with which .01% of the NRMA's membership can have a Special General Meeting called needs to be viewed in the context of the costs to the company and, thus, to the membership as a whole, both direct and indirect, in actually holding the meeting. [11] It estimated the cost of convening a general meeting at $1 million.

1.21 While acknowledging the importance of procedures to enable general meetings to be called, the NRMA stated that in the case of a large mutual, the law should encourage members to have their grievances dealt with at the Annual General Meeting so that the calling of a Special General Meeting is a last resort. [12] It recommended raising the threshold for companies with 1 million members to 1% of the membership of the company.

1.22 In its report on the Second Corporate Law Simplification Bill, the Committee was concerned that requisitioned meetings could be used improperly, to propose invalid or even `frivolous' resolutions, simply to generate publicity for the requisitioners. [13] It was suggested that members could use their right to request a meeting for improper purposes, without being aware that the meeting would be invalid, and that this would cause the company unnecessary costs and inconvenience. The Committee recommended statutory backing for the common law position that meetings must be called for legitimate reasons:

1.23 The revised Bill includes a `proper purpose' test for requisitioning a meeting (section 249Q). This provision will reinforce the limited nature of the requisitioning power under section 249D of the Bill. [15]

the inclusion of a cash flow statement in the balance sheet of registered foreign companies (Schedule 2 Part 4, items 296, 298, 299, 301 and 302)

1.24 The provision that amends section 349 of the Law will require registered foreign companies to lodge a cash flow statement, in addition to a balance sheet and a profit and loss account. These companies must lodge financial statements with the Australian Securities Commission (ASC) at least once every calender year.

1.25 In its submission to the Committee, Ernst & Young drew attention to the practical difficulties of registered foreign companies complying with this amendment:

1.26 Ernst & Young recommended this requirement be deferred until the 1999 calender year.

third party claims against insurers of deregistered companies (section 601AG)

Section 601AG of the Bill reads:

1.27 A person will be able to sue a deregistered company's insurer directly, without having to first apply to a court for reinstatement of the company's registration.

1.28 Some doubts about the wording of section 601AG of the Bill were expressed by the Insurance Council of Australia Ltd (ICA). To the extent that the section does not specify insurer's rights in respect of future claims, the ICA believes the Bill will disadvantage insurers:

1.29 It should be pointed out that the provision is unchanged from the draft Bill. However, to remove any uncertainty about the wording of the section, the ICA has suggested the following revised amendment:

Shareholder protection and corporate governance issues

1.30 The majority of comments the Committee received in evidence and submissions involved broader issues of principle and the approach underlying the Bill, and the issue most frequently raised was the extent of disclosure that should be mandated in the Bill. Comments focussed on financial reporting requirements, the form and content of annual directors' reports and the right of shareholders to review a company's performance and to be adequately informed.

1.31 The Bill's introduction into Parliament has rekindled public debate over corporate governance standards and, in particular, directors' accountability to shareholders. [18]

1.32 The debate has focussed on changes to the Law and proposals for governance based reforms being considered by Parliament. Three key corporate governance issues were identified:

1.33 During the second reading of the Bill in the House of Representatives, speakers who were following the public debate raised similar issues. [19]

1.34 This debate is reflected in the submissions and the evidence before the Committee. The Committee's consideration of the Bill, which already includes improvements in corporate governance recommended by the Committee in 1996, has provided the opportunity for further discussion.

1.35 The Committee heard opposing views regarding the level of shareholder protection and the adequacy of corporate governance structures in the Bill. Both sides of the debate made reference to world best practice and corporate governance models in other countries to support their assessment of the Bill. For example, the ASX strongly opposed any prescriptive or intrusive approach to corporate governance and warned that such an approach posed a danger and would restrict Australian companies' ability to follow world best practice:

1.36 An opposing view was presented by the newly created Investment and Financial Services Association Ltd (IFSA) which argued that the Bill falls short of providing an adequate corporate governance structure for Australian investors. [21] IFSA recommended that the Committee's corporate governance recommendations should be included in a visible way in the Bill to enhance company disclosure and general corporate governance practices:

Corporate governance

1.37 The remainder of this report discusses broader issues raised in the context of the debate over corporate governance standards and proposals to amend the Bill.

General Management Discussion and Analysis (MD&A)

1.38 Previous drafts of the Bill contained a general management discussion and analysis provision. This provision required the inclusion of narrative information on financial statements in the annual directors' report (section 299 of the Second Corporate Law Simplification Bill 1996). The requirement for a directors' report discussion and analysis or MD&A applied to companies, registered schemes and disclosing entities.

1.39 When the Committee considered the draft Bill, shareholders' groups endorsed the introduction of this provision. [23] It was also supported by the Group of 100 and the Accounting Bodies. In addition, the Committee recommended retention of section 299 unamended. [24] However, in responding to the Committee's recommendation, the government favoured a voluntary approach to providing a MD&A:

While the Government believes that proper reporting to members is an important responsibility for companies it considers that the approach proposed by the Committee is not appropriate at the present time. In particular it considers that the provision of a management discussion and analysis to members should be a matter for companies to decide. [25]

1.40 The MD&A requirement has been omitted in the Bill in favour of a requirement to discuss in general terms information relating to a company's operations and activities. This change was strongly opposed by the Securities Institute of Australia which stated the omission was contrary to international trends set by major capital markets, such as the United States, Canada and the United Kingdom and leaves Australian users of annual company reporting at a disadvantage. [26] The Accounting Bodies also expressed surprise at the withdrawal of this requirement without discussion with any interested groups. [27] They, together with other key organisations, including IFSA, the Securities Institute of Australia and Corporate Governance International recommended the reinstatement of the MD&A requirement in the Bill:

1.41 A different view on the need for a MD&A requirement was presented by the ASX which noted that a form of management discussion and analysis reporting was already required under the present Corporations Law requirements for directors' reports. [29] The ASX made the observation that management discussion and analysis in the annual reports of Australian companies was comparable with or better than that by companies from other jurisdictions, which require a MD&A. [30] It cautioned the Committee in adopting a legislative approach to prescribing the form and content of a MD&A, particularly as no guidelines had been produced.

1.42 Mr William Crosby, National Manager, Listings, Australian Stock Exchange, elaborated further on the ASX's written submission at the Committee's public hearing:

1.43 Similarly, the Group of 100 Inc, which represents senior accounting and finance executives, did not favour detailed and prescriptive legislative requirements for directors' report discussion and analysis as to content, presentation and style. However, the Group of 100 suggested the Bill include a broadly defined framework for MD&A reporting. Although it acknowledged that a MD&A may be of limited usefulness in small and medium size companies and the requirement to do so could be regarded as onerous by their directors, these concerns did not apply in respect of listed entities. The requirement for a MD&A would also improve the quality of directors' reports:

While it has been argued that the existing directors' report requirements are adequate, experience has demonstrated that, in the absence of a framework and guidance or the need to satisfy overseas listing requirements, the overall quality of such reports is not high. [32]

1.44 Other comments on MD&A reporting included:

Notice of meetings

1.45 Section 249H(1) of the Bill provides, as a general rule, that at least 21 days notice must be given for all members' meetings. [35] This extends the current 14-day minimum period to 21 days. [36] The minimum period was extended, as the Explanatory Memorandum notes, following suggestions by shareholder and investor bodies that a 14-day notice period was insufficient, particularly where the company had institutional or overseas shareholders. [37]

1.46 In its consideration of the draft Bill, the Committee examined the proposed 21-day notice period with particular reference to the enfranchisement of foreign investors who, it was suggested, owned or managed 60 per cent of Australian equities. [38] The Committee concluded that extending the period further by seven days to 28 days would involve little additional inconvenience to listed companies and was a more realistic time period. Section 249H(1) of the Bill is unchanged.

1.47 Shareholder groups and their representatives strongly favoured extending the period to 28 days and referred to the Committee's earlier recommendation for extending the minimum period. A 28 minimum period was also endorsed by IFSA, which noted the logistical difficulties involved in complying with the 21-day notice period. [39] Other comments supporting an extended period included the following:

1.48 On the other hand, the evidence from the ASX raised real concerns about the impact of extending the minimum notice period to 28 days. The ASX indicated that its listing rules require shareholder approval for a range of transactions; for example, an issue of securities (in excess of the 10% limit) in exchange for the acquisition of an asset (listing rule 7.1), the acquisition and disposal of assets to related parties (listing rule 10.1) and a disposal of a major asset to an entity to become listed (listing rule 11.4). The ASX stated that a 28-day minimum notice period could effect the outcome of a transaction (which may ultimately have been approved by shareholders) or even place the ASX in a position where it allowed the transaction to proceed without an opportunity for shareholders to approve the proposal.

1.49 Ms Deborah Hambleton, National Companies Counsel, Australian Stock Exchange, told the Committee:

Disclosure of director remuneration and senior executive salaries

1.50 An issue which reflected the tone of the debate over corporate governance practices and the approach of the Bill, was the extent of disclosure of directors' remuneration and whether specific information on remuneration matters should be included in the annual directors' report.

1.51 The ASX told the Committee that disclosure of the details of director remuneration beyond that presently required would not add to the information for the making of investment decisions and doubted the value of detailed remuneration disclosure:

1.52 The sources of disclosure requirements for director and executive remuneration are section 300 of the Bill and Accounting Standards. The Accounting Bodies advised the Committee that accounting standards were revised to make these consistent with the Corporations Regulations. Moreover, it was stated that the AASB Accounting Standards were the more appropriate vehicle for disclosure of director remuneration:

1.53 Submissions from Corporate Governance International, IFSA and the International Corporate Governance Network advocated the inclusion of the details of directors' remuneration in the annual directors' report as recommended by the Committee in its report on the draft Bill. The Committee had recommended:

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. [49]

1.54 In evidence to the Committee, Mr Ian Matheson, Governor of the International Corporate Governance Network, referred to the benefits for shareholders of greater disclosure of remuneration details:

1.55 However, the ASX did not believe any other proper purpose could be served by mandating further disclosure in this area. It added:

In any case, there seems no reason why detailed disclosure of remuneration, if it were introduced, should not also extend to other groups that raise money from the public, such as managers of collective investment schemes. [51]

1.56 The Committee notes that section 300 of the Bill requires the disclosure of all options that are part of director and senior company executive remuneration. These options can form a substantial component of the remuneration package. Specifically, the Bill states:

1.57 The Explanatory Memorandum to the Bill advises that this requirement takes into account the widespread use of employee share schemes, the operation of existing ASC class orders and the need to provide information to shareholders about the most significant employees of an entity. [52] Section 300, however, does not require remuneration details to be included in the directors' report if these are included in the company's financial report.

1.58 The Committee accepts the current approach taken in the Bill but recommends the government consider whether more detailed disclosures are required and whether they should be disclosed in the directors' report, in the context of developing legislative proposals under the CLERP Program, Directors' Duties and Corporate Governance.

Conclusion

1.59 Many opposing views were put to the Committee concerning corporate governance reform and the adequacy of shareholder protection in the Bill. Because of the current debate over corporate governance standards and the degree to which all previous drafts of the Bill were subject to scrutiny and comment, the Bill has understandably aroused keen and intense interest from users of the Law, regulators and shareholders. Consideration of the Bill, which will in the Committee's view improve corporate governance practices, has provided the opportunity for an informed parliamentary debate of these issues.

1.60 In terms of the corporate governance issues discussed in this report, some members of the Committee are concerned that the Bill does not sufficiently address the major concerns of national and international investors, institutional investors and shareholders groups. These concerns were raised in debate during the second reading of the Bill and may again be raised when the Bill is debated in the Senate. [53] The areas of concern to shareholders, both large and small, relate to the disclosure of financial information, including details of director and senior executive remuneration, annual director's report to shareholders, the minimum notice period for members' meetings and voting procedures at meeting.

1.61 The Committee welcomes the approach of the Bill in regard to the use of electronic technology for communication between companies, their shareholders and regulatory bodies. The Bill does not impose, nor should it, an obligation to use electronic forms of communication but rather the Bill facilitates its greater use to improve the flow of information in the market.

1.62 The Committee's report includes a number of drafting issues, which the Committee suggests might be further considered by the government.

Recommendation

The Committee recommends that, subject to any minor drafting or technical amendments, the Bill be passed in its current form.

Senator Grant Chapman

Chairman

 

Footnotes

[1] This is illustrated by the fact that the Bill will reduce the size of the current Law. The Bill replaces around 95000 words of text with 54000 words.

[2] Senator the Hon Ian Campbell, Committee Hansard, 23 March 1998, CS31-CS32. See also the Treasurer's Press Release No. 28, 17 March 1998 Business Law Reforms to Boost Jobs and Economic Development.

[3] The government response was tabled in the Senate on 18 November 1997. See Hansard, Senate, 18 November 1997, P8849-P8854.

[4] Hansard, Senate, 3 March 1998, P153.

[5] Hansard, Senate, 30 March 1998, P1053.

[6] Parliamentary Joint Committee on Corporations and Securities, Report on the Draft Second Corporate Law Simplification Bill 1996, November 1996, p 7.

[7] Australian Society of CPAs and The Institute of Chartered Accountants in Australia, Joint Submission No 4, p 1.

[8] Australian Society of CPAs and The Institute of Chartered Accountants in Australia, Joint Submission, p 10.

[9] Australian Stock Exchange, Submission No 2, p 1.

[10] Australian Stock Exchange, Submission No 2, pp 2-5, Detailed Submission in Support of ASX Submission.

[11] NRMA, Submission No 1, p 2.

[12] NRMA, Submission No 1, p 2.

[13] Parliamentary Joint Committee on Corporations and Securities, pp 16-18.

[14] Parliamentary Joint Committee on Corporations and Securities, p 18.

[15] See Corrs Chambers Westgarth, Submission No 13, p 3.

[16] Ernst & Young, Submission No 5, p 1.

[17] Insurance Council of Australia Ltd, Submission No 10, p 1.

[18] See for example the recent articles Some black letters over company law, AFR 8/1/98, p1; Directors must lay cards on the table, AFR 5/1/98 p 17; Disclosure doubts in new reports, SMH 7/1/98 p 11; Case for more corporate freedom, AFR 13/1/98, p 11. Supporting the changes proposed in the Bill, Mr Richard Humphry, Managing Director of the Australian Stock Exchange, argued that Australia is very successful in attracting international equity investment our attractiveness depends on far more substantial factors than whether or not annual reports attach specific salaries to the names of directors, or whether notices of meeting are issued 21 or 28 days in advance - not that these are necessarily insignificant. Mr Humphry advocated greater corporate freedom saying that By and large, the balance in Australian corporate regulation appears to have shifted too far towards a prescriptive and intrusive approach and the degree of our apprehension about easing corporate regulation may well be excessive. On the other side of the debate, criticism of the Bill came from the Australian Shareholders' Association (ASA) and the Australian Investment Managers' Association (AIMA) which believe that corporate governance standards will be diminished. Mr Paul Murphy, Acting Executive Director of AIMA, advocated changes to the Bill to provide, at minimum, the basic protections of investor interests and rights which would include the requirements to disclose voting results, to give at least 28 days notice of meetings, and to disclose compensation policies and links to performance. The ASA pointed to the stewardship of Burns Philp and Crown Ltd as examples of the need for tighter corporate governance and greater market disclosure.

[19] See Hansard, House of Representatives, 4 March 1998, P274-P282, P302-P307. A further issue involved the possible taxation consequences of the changes to share capital.

[20] Australian Stock Exchange, Submission No 2, pp 2-3.

[21] IFSA membership covers those institutions, which previously belonged to the Australian Investment Managers' Association, the Life Insurance and Superannuation Association and the Investment Funds Association.

[22] Investment & Financial Services Association Ltd, Submission No 3, pp 1, 4.

[23] Parliamentary Joint Committee on Corporations and Securities, p 32.

[24] Parliamentary Joint Committee on Corporations and Securities, p 34.

[25] See Hansard, Senate, 18 November 1997, P8853.

[26] Securities Institute of Australia, Submission No 8, p 1.

[27] Australian Society of CPAs and The Institute of Chartered Accountants in Australia, Joint Submission, p 1.

[28] Australian Society of CPAs and The Institute of Chartered Accountants in Australia, Joint Submission, p 1.

[29] See sections 304 and 305 of the Law.

[30] Australian Stock Exchange, Submission No 2, p 7, Detailed Submission in Support of ASX Submission.

[31] Mr William Crosby, Committee Hansard, 12 March 1998, CS11-CS12. Other participants in the Working Party convened by the Group of 100 are the Australian Institute of Company Directors, the Securities Institute of Australia, the Business Council of Australia, the Australian Society of CPAs and The Institute of Chartered Accountants in Australia.

[32] Group of 100 Inc, Submission No 6, p 2.

[33] Group of 100 Inc, Submission No 6, p 1.

[34] Corporate Governance International, Submission No 7, p 4.

[35] A longer minimum period of notice may be specified in a company's constitution; or meetings may be called at shorter notice if the requisite majority of members (all members for an AGM and members with at least 95% of the votes in other cases) agree beforehand. The Bill also recognises that a notice of meeting may be given by fax or electronically (section 249J(3)) and allows a company to receive a proxy document by fax or electronically (section 250B(3)).

[36] The Bill also removes the distinction between notice periods for different types of resolutions.

[37] See Explanatory Memorandum, para 10.26.

[38] Parliamentary Joint Committee on Corporations and Securities, pp 19-20.

[39] Investment & Financial Services Association Ltd, Submission No 3, p 1.

[40] Corporate Governance International, Submission No 7, p 6.

[41] Corporate Governance International, Submission No 7, p 6.

[42] Corporate Governance International, Submission No 7, p 7.

[43] Mr Ian Matheson, Committee Hansard, 12 March 1998, CS2.

[44] Mr Ian Matheson, Committee Hansard, 12 March 1998, CS3.

[45] Ms Deborah Hambleton, Committee Hansard, 12 March 1998, CS12. See also Australian Stock Exchange, Submission No 2, p12.

[46] Mr William Crosby, Committee Hansard, 12 March 1998, CS12. See also Australian Stock Exchange, Submission No 2, p 3.

[47] Schedule 5 of the Corporations Regulations requires disclosure of the total income of directors of a company and disclosure of the number of directors whose total income falls within each band of income of $10,000. Schedule 5 also requires the disclosure of the number of executives of a listed entity whose total income falls within each $10,000 band of income after $100,000 and the total income of all such executive officers.

[48] Australian Society of CPAs and The Institute of Chartered Accountants in Australia, Joint Submission No 4, p 2.

[49] Parliamentary Joint Committee on Corporations and Securities, p 35.

[50] Mr Ian Matheson, Committee Hansard, 12 March 1998, CS5-CS6.

[51] Australian Stock Exchange, Submission No 2, p 3.

[52] Explanatory Memorandum, para 13.35.

[53] Hansard, House of Representatives, 4 March 1998, P274-P277.