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Tuesday, 1 February 1994
Page: 36

Mr WILLIAMS (4.40 p.m.) —The Corporate Law Reform Bill 1993 is the successor to the Corporate Law Reform Bill (No. 2) 1992, which the government has now withdrawn as a result of considerable institutional and opposition criticism. The criticisms were largely directed at the provisions relating to enhanced and continuous disclosure. The bill now before the House takes into account the main thrust of those criticisms.

  As well as implementing an enhanced and continuous disclosure regime for certain listed and unlisted entities, the bill amends the Corporations Law to reform prospectus provisions to take into account continuous disclosure and to facilitate fundraising; to relax the present restrictions on companies indemnifying and insuring their officers and auditors; and to facilitate the use of print-outs from the national database of the Australian Securities Commission, the ASC, as evidence in court proceedings.

  This bill is not opposed by the coalition. The changes made to the original bill by this bill are welcome. The bill unquestionably provides benefits to investors. The coalition does, however, have some underlying disquiet with the legislation in significant respects. The first concerns the need to demonstrate that the benefits following from the legislation outweigh the cost to business. A related point concerns the introduction of lengthy and complex legislation at a time when the government has announced a review with the aim of simplifying the Corporations Law.

  As to the first point, I note that business and industry groups have generally been supportive of this bill. However, my sense from the many groups I have consulted is not that the reforms are welcome as such, but that they constitute a significant improvement on the original proposals contained in the original bill. In other words, accepting the inevitability of further regulation in a number of areas, industry groups have fought for as sensible and economically rational a regime as is possible. The fact that the government has listened and responded is to be acknowledged. I note, however, that some within the government and the Attorney-General's Department have had difficulty in accepting the criticisms.

  Any new legislation in this sphere, even legislation enacted with the best of intentions, is enacted at significant cost. The legislative framework must be fleshed out through regulations and administrative arrangements. In the present case, particularly in relation to continuous disclosure, those arrangements will require extensive negotiations between the ASC and the Australian Stock Exchange, the ASX. Lawyers, accountants, company directors, company secretaries and, ultimately, courts must interpret the legislation. There will be a period of considerable uncertainty and cost.

  It should be demonstrated that the benefits to be gained from further legislation outweigh the costs imposed. Of course, balancing protection of investor interests against costs incurred in additional reporting and disclosure requirements is a very difficult exercise. My impression is that the scales are finely balanced.

  Those scales are tipped towards the cost side when the second point is considered. It seems incongruous that the legislation is being introduced in its present form, given that in September last year the Attorney-General (Mr Lavarch) announced `an ambitious program of simplification of the Corporations Law'. He said that part of that program would include a review of whether all the current reporting requirements should stay. The current bill contains significant changes to company reporting requirements, but is certainly not imposed as part of a simplification agenda. So the government is announcing a review to simplify legislation before the legislation is even enacted.

  Company directors, company secretaries, accountants and lawyers all have to become familiar with, and ensure compliance with, the complex provisions of this bill. An administrative and regulatory regime has to be built up around the legislation. That knowledge and that structure are all for naught when the government seeks to rewrite the provisions as part of a simplification program. Simplicity in the field of Corporations Law is a relative concept. Even a vastly simplified Corporations Law, if it were possible, would be complex by anyone's standards. That would then have to be relearned and interpreted. Simplification of the Corporations Law is to be commended and is supported by the coalition. But that need to simplify the Corporations Law has been brought about in large part by the Labor government itself, which in the last three years has caused well over 1,500 pages of new legislation to be enacted.

  It is striking that this particular bill is being introduced after the announcement of the simplification program. A respected Corporations Law academic and the dean of an Australian law school commented to me that this bill `makes a complex and unwieldy statute even more complex and unwieldy'. The contradiction does not end there. The government is proposing still more legislation.

  The government needs to think seriously the relationship of the proposed corporations legislation to its simplification program. The logical course, it seems to me, is to combine an expedited simplification review with a moratorium on amendments to the law other than those that are urgently required.

  I turn to specific aspects of the bill, beginning with the enhanced statutory disclosure scheme. The scheme proposed in the original bill was a product of the Companies and Securities Advisory Committee report of September 1991. The thrust of the committee's recommendations was included in the original bill, with modifications designed to ensure a less onerous and more cost-effective system. The original bill required, amongst other things, that disclosing entities make timely disclosure of any `material matter' to the ASC and, in certain instances, the ASX and that disclosing entities lodge detailed half-yearly reports.

  Three significant criticisms were levelled at the original bill. First, it would require companies to provide similar information to both the ASC and the ASX under its existing listing rules. Second, it would create a discrepancy in the time frame in which information was required. Under the ASX listing rules `immediate' disclosure is required. The original bill allowed three days in which to make disclosure to the ASC. The practical effect was likely to result in a lesser standard of disclosure than that which had currently existed. Third, the original bill specifically allowed withholding of disclosure of `confidential or commercially sensitive' information. The so-called carve-out provisions of the original bill provided significant scope to circumvent the continuous disclosure requirements. More generally, the reforms were criticised on the ground that they constituted an overreaction to the corporate excesses of the 1980s and that there was a danger of excessive regulation without proper regard to cost.

  The House of Representatives Standing Committee on Legal and Constitutional Affairs recommended in November 1991 that enhanced disclosure requirements should build on the existing framework for disclosure by the ASX. This is the main change contained in this bill. That change has consistently been advocated by the coalition.

  In effect, in relation to listed entities, the bill gives legislative backing to listing rule 3A(1). The rule requires immediate disclosure of relevant information. The bill provides for criminal and civil liability, depending on the nature of the breach of the provisions.

  There is no specific provision in the bill for carve outs. In his second reading speech, the Attorney-General stated that the ASX has agreed to consider the adoption of an express confidentiality provision. The bill specifically allows for the ASC to exempt specified persons. Exemption would also be possible under the corporations regulations. I will comment on this later.

  The ASX is not the appropriate body to deal with disclosure requirements by unlisted entities. The bill provides for a statutory scheme of continuous disclosure to the ASC analogous to that proposed for listed entities in relation to the ASX. It is anticipated that as most unlisted entities whose securities are traded or offered for sale are already required to disclose material information in prospectuses, most unlisted entities will not be involved in additional disclosure under the provisions.

  While the reporting entities are primarily liable to provide information, the bill provides that persons `involved in' the contravention may also be held responsible. The bill strengthens the ASX's enforcement powers in two significant respects. First, the ASX need not give an undertaking as to damages when seeking a court order in relation to a breach of its rules. The current requirement to give an undertaking is a significant deterrent to the ASX taking action against those entities which breach listing rules. Secondly, the bill will confer on securities exchanges the protection of qualified privilege when they publish information provided to them under the disclosure regime or as part of their general functions of supervising listed entities. The provision will dispel doubt as to whether qualified privilege applies at common law.

  The bill contains provisions ensuring an information flow between the ASC and the ASX and domestic securities and futures exchanges. The ASC is permitted to provide confidential information to exchanges, subject to certain safeguards. Exchanges are required to notify the ASC in the case of serious contraventions of listing or business rules or the Corporations Law.

  The bill requires that disclosing entities prepare half-yearly accounts. The requirements are similar to those for annual financial statements, although not quite as detailed. The accounts need not be fully audited. A simple review by an auditor is sufficient. The Australian Accounting Standards Board is given power to make accounting standards for the purposes of the half-yearly report.

  In the light of that summary of the main provisions of that part of the bill, the abandonment of the overlapping disclosure systems is to be welcomed. I wish to comment on a number of matters arising from those provisions.

  The first comment concerns the issue of carve-outs, which is not finally settled by this bill. That is not inappropriate. It would have been very difficult to have created black letter law carve-out provisions. To have done so would have resulted in more complex legislation and reduced flexibility.

  The more incremental and flexible approach contemplated by the bill relies heavily on the judgment of the ASX and, to a lesser extent, the ASC. The ASX has agreed to consider modification of its listing rules. The relationship between the ASC's regulatory powers and the ASX's listing rules and discretionary powers will need to be considered carefully and will necessitate close cooperation between those two bodies. That process will be closely monitored by the coalition.

  In the deliberations relating to the original bill questions were raised concerning the appropriateness and the capacity of the ASX to supervise the disclosure regime. The suggestion was that the ASX as a participant or player in the securities trading game could not also act as umpire. Could the poacher be an adequate gamekeeper? The coalition believes that the ASX does have the capacity. But the manner in which the disclosure scheme works will be dependent greatly on how well the ASX does its job. The coalition will keep a close eye on that aspect.

  The bill requires the Companies and Securities Advisory Committee to review the operation of the continuous disclosure and related enforcement provisions 18 months after their commencement. In general, that is to be welcomed. However, one can only speculate as to what stage the simplification program will have reached by then and the impact it will have on this legislation. The legislation gives little indication as to the nature of the review. It will obviously be crucial that the review occur in consultation with the ASC, the ASX, the entities subject to the new law, the investment intermediary community and investors to determine their reactions to the law. It would be desirable that there also be sophisticated analysis of securities pricing behaviour to determine what effect the new law has had on securities pricing.

  Concern has been expressed at the application of the provisions to foreign incorporated issuers and the potential impact upon international comity. The provisions on their face will apply to a number of international companies which are currently not required to comply with financial reporting requirements of Australian law. Under this bill, unless exemptions are granted, such corporations will be required to comply with the continuous disclosure and annual and six-monthly reporting requirements.

  In a number of overseas jurisdictions, schemes are being developed which recognise the disclosure requirements of foreign issuers in their local jurisdictions. In Australia, the application of such principles will be left to the discretion of the ASC and the ASX in their development of carve-out provisions and their use of exemption powers. The importance of maintaining and enhancing Australia's capital markets must be kept in mind as those tasks are undertaken.

  I now turn to the provisions of the bill dealing with prospectuses. In March 1992 the Prospectus Law Reform Subcommittee of the Companies and Securities Advisory Committee issued a report dealing with reforms to the Corporations Law prospectus provisions. The subcommittee endorsed the concept of continuous disclosure and recommended, amongst other things, that abbreviated prospectuses be allowed for listed entities which have fulfilled their continuous disclosure requirements.

  The bill provides relief from the prospectus provisions of the Corporations Law to non-exempt entities which have been disclosing entities for 12 months prior to the offer of securities. Information concerning the entity will already be available to the market through the continuous disclosure requirements. The entity has the option of issuing a prospectus containing transaction specific information.

  The bill also contains provisions designed to improve and streamline the operation of the prospectus provisions of the Corporations Law. Prospectus requirements for secondary trading are limited to the case where a person wishes to sell 30 per cent of the voting shares in an unlisted company. In other cases, trading will occur by way of information memorandum.

  Amendments are also made to the supplementary prospectus provisions. A replacement prospectus is introduced as an alternative to a supplementary prospectus. One or other must be lodged as soon as practicable after the issuer of the original prospectus becomes aware of the need to correct material omissions or material statements that were false or misleading. As these amendments are designed to ensure that prospectuses are kept up to date, the bill extends the life of prospectuses from six to 12 months. The bill allows for documents lodged with the ASC to be incorporated by reference into prospectuses.

  While these reforms are not objectionable in themselves, there has been criticism that reform of prospectuses has been haphazard. A recent published view of a practitioner in this field states a number of crucial areas where reform is needed but has been completely overlooked. One example is the overlap of trade practices law and section 995 of the Corporations Law to extend potential liability to innocent misstatements concerning securities matters. One may add there, as an addition, the overlap of common law remedies.

  At the same time, the practitioner notes, there is nothing fundamentally wrong with the current secondary sale and supplementary and replacement prospectus provisions. He encapsulates the difficulties faced by those regulated when he says:

Such fundamental turmoil in the structure of our laws on such a continuing basis, gives rise to an inevitable uncertainty and lack of predicability as the market has to make the necessary adjustments to the new legislation and as inevitable drafting errors are identified in the legislation.

Provisions in the bill relaxing restrictions on the ability of companies to indemnify officers and auditors are to be welcomed. The amendments are based on reports of both the Companies and Securities Advisory Committee and its predecessor, the Companies and Securities Law Review Committee.

  Under the bill, a company or a related company will not be prohibited from indemnifying an officer or auditor of the company against liability incurred by the person in that capacity provided the liability arises to a third party and does not involve a lack of good faith. Existing provisions allowing indemnities in respect of costs incurred in legal actions are preserved.

  A company or a related company will also not be prohibited from taking out insurance to benefit an officer or auditor of the company provided the liability does not involve a wilful breach of duty to the company or the gaining of an improper advantage, as defined in the Corporations Law. Insurance will also be possible to cover the costs of legal actions brought against officers and auditors.

  The bill enables a document that purports to have been prepared by the ASC from the database by using a data processor to be admissible in a proceeding in a court as prima facie evidence of the matters stated in it. Certification of the document is not required. The amendment is intended to reduce substantially the circumstances in which routine and expensive formal certification of documents is required in court proceedings.

  I am somewhat concerned with the apparent breadth of this provision. It is not entirely clear to me from the wording of the provision how it would operate in practice. Let me take some examples. The provision would allow production of the document from the database to prove that the persons on the form were directors of the company at times stated in the document. That could be rebutted by evidence to the contrary. In a similar vein, the provision would be used to adduce evidence of the incorporation of a company, appointments of receiver or liquidator and registration of charges. I have no difficulty with the provision to the extent it is to facilitate proof of such formal matters.

  However, other examples give greater cause for concern. An annual report contains the accounts of the company. It is not objectionable that the provision should facilitate proof that the annual report was prepared, that it was lodged and that the accounts were signed off. However, what about the truth of the content of the accounts? Under the provision the annual report is admissible as `prima facie evidence of the matters stated in so much as the writing sets out what purports to be information obtained by the Commission'. The effect seems to be that the provision is intended to prove the content of the annual accounts prima facie. That could be done by production of the ASC document without there being available to the party against whom the document is adduced the opportunity to cross-examine a witness who knows something about the accounts.

  In the report by the chairman or by the directors contained in most annual reports, contentious assertions of fact are not infrequently made. The effect of the provision appears to make the assertion prima facie proof of the truth of the assertion and not merely proof that the assertion was made. Again, that could be adduced into evidence without there being available to the party against whom the evidence is adduced the opportunity to cross-examine a witness who knows anything about the truth of the assertion. The manner in which the provisions operate in practice will need to be closely monitored to ensure that injustice to parties in either civil or criminal proceedings does not result.

  A number of technical criticisms have been made of various provisions of the bill by academics, legal practitioners and industry groups. I mention just two. I have already indicated that the bill legislatively entrenches ASX listing rule 3A(1). In fact, the bill states that relevant entities must not contravene any of the listing rules applicable to the entity. It is not at all clear which listing rules other than 3A(1) might be applicable.

  The timing requirements are uncertain. Listed entities must disclose the information `immediately' as required by listing rule 3A(1). Unlisted entities must disclose `as soon as practicable' after the entity becomes `aware' of the information. What these provisions respectively require is uncertain. There are certainly practical difficulties that may arise in relation to the requirement of immediate disclosure.

  In legislation of this nature there are always going to be ambiguities, omissions and errors of some nature. In part they will be resolved by regulatory and administrative clarification; in part they will be resolved by the courts; and, in smaller part only, it is to be hoped, further legislative amendment may be required. That all results in time, uncertainty and cost. It underlines my earlier comments concerning the wisdom of introducing this legislation in the shadow of a simplification program to rewrite the Corporations Law.