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Chapter 16 - Other Matters
16.1
In the course of the inquiry by the PJSC some
suggestions were made to the PJSC that other additional matters arising from
the Company Law Review Act 1998 ought to be dealt with in subsequent
legislation. These additional matters are discussed below.
Redeemable preference shares
16.2
A number of submissions drew attention to the
operation of redeemable preference shares under the new section 254K of the
Corporations Law, inserted by the Company Law Review Act 1998.[1] Ernst & Young told the PJSC
that the section will prevent redeemable preference shares (RPFs) from being
used in the manner originally intended as withdrawable/returnable capital. The
problem is caused by the extension of ‘capital maintenance’ requirements to
RPFs under section 254K. Previously, only the par value of RPFs was required to
be included under the ‘maintenance of capital’ requirements. The par value,
which was very small relative to the premium, was redeemable from profits or
from the proceeds of new issues of shares. The share premium was recorded when
the shares were issued and eliminated when the shares were redeemed. The share
premium reserve was used to pay the premium on RPFs. Accordingly, RPFs were
structured with a low par value and a high share premium.
16.3
Ernst & Young advised the PJSC that the Law
requires the whole of the value of the share (par value and share premium) to
be maintained by the proceeds of a new share issue or out of profits. This is
inconsistent with the removal of the ‘capital maintenance’ concept in Chapter
2J of the Law. At its hearing on 16 June 1999, Mrs Ruth Picker, a Partner with
Ernst & Young, told the PJSC that the redeemable preference share
provisions should be repealed:
It seems to me that dealing with one particular type of financial
instrument, being a redeemable preference share in the law, and singling it
out, has no purpose anymore. There does not seem to be any need for it,
particularly now that par value has gone, particularly now that we have an
accounting standard on how to account for these. In fact, in many cases a
redeemable preference share would be classified as debt under the accounting
standards, not as equity; not as capital in the first place. So there would be
no need to have any kind of capital maintenance provision for it under the law.
Our submission in relation to redeemable preference shares is to remove section
254KB, but, even further, to consider removing all provisions specifically
relating to redeemable preference shares.[2]
Selective capital reductions
16.4
Section 256B of the Law relates to capital
reductions and section 256C specifies the requirements for shareholder approval
for what are called “equal reductions” and “selective reductions”. Under
256B(2) a reduction in share capital is an “equal reduction” if it relates only
to ordinary shares, it applies to each holder of ordinary shares in proportion
to the number of ordinary shares they hold, and the terms of the reduction are
the same for each holder of ordinary shares. For an “equal reduction” the Law requires
an ordinary resolution by shareholders. If unequal amounts are paid in a
reduction of share capital, proportionate to the amount paid up on the shares,
then it is a “selective reduction”. In this case, the Law requires either (a) a
special resolution where no votes are cast in favour of the resolution by
shareholders who will receive consideration as part of the reduction or (b) a
unanimous resolution at a general meeting.
16.5
Dr Elizabeth Boros of the Law Institute of
Victoria told the PJSC that under the procedures for shareholder approval of
“selective reductions” a unanimous resolution was not likely to happen for any
listed company. To reduce the capital under these circumstances the company
would need to pay an equal amount for each share, whether fully paid up or not.
Dr Boros noted that in some cases under the current provision the selective
reduction approval requirement has the unintended effect of delivering
“disproportionate power to one dissenting shareholder”.[3] Dr Boros recommended that the Law
should provide for a class protection mechanism in place of the current
approval requirements. Dr Boros referred to the judgment of Santow J in the
case of Re ETRADE Australia Limited (1999) NSWSC 254:
The effect of that definition in the present circumstances would
have been to give rise to the absurdity that in practical terms the necessary
resolution could not have been passed unless there were total unanimity,
inviting corporate blackmail. This is because no shareholder could vote under
paragraph (a) – as all shareholders receive consideration as part of the
resolution. That renders paragraph (b) applicable, requiring unanimity of all
ordinary shareholders at the meeting. Even one dissenting shareholder could
thus scuttle the proposal.[4]
Table of replaceable rules - section 141
16.6
Freehill Hollingdale and Page advised the PJSC
that some confusion has resulted from amendments to section 141 which sets out
the provisions of the Law that apply as replaceable rules. The purpose of the
Table of replaceable rules is to assist users in particular small business for
which the replaceable rules are principally designed. However, as a result of
the amendments and the renumbering of the table items, the table is incomplete
and inaccurate. To contain a complete and accurate list of the replaceable
rules, Freehill Hollingdale and Page recommended that a reference to section
224D should be inserted in Table item 2.[5]
Drafting of section 112(4)
16.7
Section 112 of the Law deals with the two types
of proprietary companies and four types of public companies that can be
registered. Section 112(4) which deals with restrictions on tribute
arrangements for a no liability company replaces former section 398 of the Law.
Mr Stephen Stockwell, a Senior Associate with Mallesons Stephen Jacques,
submitted that in duplicating the restriction in the former section, new
section 112(4) has omitted an important requirement thereby creating an anomaly
under that section.[6]
Specifically, section 112(4) makes no reference to a 3 month time limit on the
duration of a tribute arrangement effected without shareholder approval which
was in the former section. Mr Stockwell advised that there did not appear to be
any basis for a change in the Law.
Anomalies in the Company Law Review Act
16.8
In addition to its written submission to the
PJSC, the Law Institute of Victoria provided the PJSC with a summary of
drafting anomalies contained in the Company Law Review Act 1998. [7] Some of these drafting issues
have been considered by the PJSC elsewhere in this Report. The remaining
anomalies are of a technical kind.
Conclusion
16.9
The PJSC has not undertaken an inquiry into the
additional matters raised and is therefore unable to offer a definitive
judgment on the merits of the drafting issues and the particular anomalies arising
from the Company Law Review Act. However, the PJSC has made available all of
those comments and suggested amendments to the Government for further
consideration.
Senator Grant Chapman
Chairman
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